Question

Discuss how to apply the allowance method when recording uncollectible accounts receivable and what effect this method has on the balance sheet and income statement. How does this method differ from the direct write-off method ?

Answer 1

Allowance for uncollectible account refers to an accounting estimate which records and estimate of doubtful or uncollectible receivables and expenses as an bad debt expense. This is a contra asset account i.e. allowance for uncollectible recorded under allowance method adjusts the accounts receivable on the balance sheet whereas is expensed in income statement as bad debts expense. The allowance method records an estimate of bad debts expense in the same accounting period as the sale. It follows the matching principle which states revenues need to be matched with the expenses incurred in that same accounting period

The companies follow percentage of sales or percentage of accounts receivable methods to estimated uncollectible receivables

Under direct write-off method uncollectible accounts receivables are written off as bad debt as an when incurred. It does not follow the matching principle as bad debt is only expensed when accounts receivables is actually written off, may be several months after credit sale. No estimates are drawn and no contra asset is created.