At a recent board of directors meeting of Bismark Corp., one of the directors expressed concern...

At a recent board of directors meeting of Bismark Corp., one of the directors expressed concern over the allowance for uncollectible accounts appearing in the company's balance sheet. ldon' t understand this account," he said. Why don't we just show accounts receivable at the amount owed to us and get rid of that allowance? Respond to the director s question; include in your response? (a) an explanation of why the company has an allowance account (c) how accrual accounting (as opposed to the cash-basis accounting) affects the presentation of accounts receivable

Expert Solution

An allowance account for debtors is an estimate of uncollectible amount of debtors which arise due to credit sales. In business there will be always some percentage of sales which is uncollectible from customers. At the end of the period management can provide estimate of percentage of accounts receivable that cannot be collected by debiting bad debts accounts and crediting the allowance account. The allowance account is a contra account which is deducted from the debtors balance and net balance is shown in Balance sheet

Allowance for doubtful debts in line with accrual concept of accounting. The reason being the bad debt expense provided for in the profit and loss account is based on sales reported in the respective period. Hence it is accurate way of presentation of financial statement compared to direct method of write off. The actual write off of bad debts is done in Provison for doubtful debts account by debiting the same and crediting the Debtors account. Direct method of write off will lead to swing in results since earlier sales related bad debts may be written off in current period. Hence allowance for doubtful debts is the recommended way of accounting for uncollectible debtor amount.

ekkarill92 answered 2 years ago

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