Compare and contrast the allowance method and the direct method to account for uncollectible accounts. Provide...

Compare and contrast the allowance method and the direct method to account for uncollectible accounts. Provide journal entries of how each method is used to record an example write-off and a subsequent partial collection of the written-off amount.

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Expert Solution

Under Direct write off method a bad debt is charged to expenses as soon as it is apparet that the invoice will not be paid or collected

Under allowances method an estimate of amount of bad debt is made and it is transferred to a reserve account as soon as when a sale is made

Major differences between the allowances and direct write off method can be described in the following way

Timing : under allowance method bad debt expense is immediately recognised but such recognition is delayed in direct write off method,which results in higher profits under direct write off method in the earlier stage

Accuracy: Under direct write off method the amount of bad debt is exactly known because a particular invoice is being written off but in allowances method only an estimate amount is charged.

Under Direct write off method the entry would be

Bad debt expenses A/c Dr.

To Account Receivables

(Amount will be the amount which cannot be collected from the customer)

Under Allowances method

When an estimate is made

Bad debts Expenses A/c Dr.

Allowances for Doubtful debts Accounts A/c

Amount will the amount estimated using sales or account receivables

When it is Written off

Allowances for Doubtful debts account A/c Dr

To Account Receivables A/c

ekkarill92 answered 1 year ago

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