Question

Frederick and Sons is a small company that makes faucets rings.   They have experienced a larger than normal bad debts due to the slowdown in the economy.  Koehler Corporation is a multimillion-dollar Corporation that makes faucets and other plumber supplies is also experiencing bad debt losses. What method would each company use when writing off customers’ accounts unable to pay and why?   Give an entry for each when actually writing off a customer’s account.

Answer 1

Company can use the following methods:

• Direct write off

In this method, we directly write off the account receivables/ debtors by debiting the bad debts and crediting the account receivables.

Entry would be:

Bad Debts A/c Dr. xxx

To Account Receivables A/c xxx

(Being bad debts recorded)  

• Allowance method

In this method, we create a provision for doubtful debts on the basis of reasonable estimation. In this entry of writing off bad debts involves debiting the provision A/c and crediting the Account receivables A/c .

Entry would be:

Provision for doubtful debts A/c Dr. xxx

   To Account Receivables A/c xxx

(Being provision utilised for writing off bad debts)

Now,

Allowance method is preferred over direct method because it shows the realistic situation of statement of account.

Also, it follows the principle of conservatism which involves recording the anticipated losses.