Question

Please respond to the following three statements:

• Discuss the pros and cons of selling to customers on account rather than only accepting cash and check payments.

• List and describe at least two (2) differences between the Direct Write-off Method and the Allowance Method discussed in this chapter.

• List and describe at least two (2) differences between the Percentage-of-Sales method and Aging-of-Receivables method, both of which are under the allowance method of accounting for receivables.

Answer 1

These days there are various payment avenues available to customer for making payments. The customers are moving towards online mode of payment through various payment apps, like Paytm, GPay, Phonepay, etc. These avenue provide mobility and makes the cutomer hassle free by not making them carry cash or cheque book with them. You have have to make few clicks or taps, and you have successfully completed the transaction.

(a) With these account transactions comes various pros and cons.

Pros: 1. Saves time, as you are just few click away for making payment.

2. Hassle Free, you don't have to carry cash with you all the time.

Cons:

1. You have to pay some charges for every online transaction you make.

2. You have to maintain enough money in your bank account to make payments.

3. There are high chances of online frauds.

(b) 1. In direct write off method, the bad debt is recorded when it is happened and an invoice is presented for the same. Therefore this method is delayed one. In Allowance Method, the bad debt is recorded before its happening and is therefore considered faster than the direct write off method.

2. The amount of bad debt in direct write off method is accurate because of the invoice of bad debt is presented. The amount of bad debt is unknown under Allowance method as the amount recorded is for the future bad debt.

(c) The major difference between Percentage of Sales method and Ageing of Receivables method is that the percentage of sales does not consider the salvage value in the bad debts allowance account, while the salvage value in the bad debt allowance account in the ageing of receivables method is considered as a part of the estimate for the bad debts .

In the Percentage of sales method, the allowance account increases, but in the Ageing of Recivables method , the allowance is equal to the ageing allowance calculated.