the diference between the Direct Write off method and Allowance Method of writing off a receivable?!

Expert Solution

There are 2 ways to account for bad debt. The fundamental difference is in timing difference of bad debts expense recognition and accounting principles applied for accounting bad debt expense.

Direct write-off method: This method accounts for bad debts based on actual bad debts that is when customer is unable to pay and it is confirmed that it is a bad debt. In this case the bad debts are debited to Income statement and credit is given to Accounts receivable. Accounts receivable are shown as net in Balance sheet. There is no separate account used for bad debts accounting like allowance account. This method is not in accordance with accrual concept and matching concept since bad debts are not accrued for each period and bad debts of different period can be charged to sales of different period.

Percentage of allowance method: This method considers the percentage of allowance on credit sales and aging of accounts receivables during the period and accounting is done through an Allowance for uncollectible receivables. The bad expense is calculated as percentage of closing Accounts receivable balance. A bad debts expense is debited and credit is given to allowance for uncollectible receivables. Only when the dues are unable to be recovered it is debited to Allowance for uncollectible receivables account and credit is given to accounts receivable account. The provision for doubtful debts is a contra asset account with credit balance. It is deducted from Accounts receivable balance and net balance of Accounts receivable is shown in Balance sheet. This method is in accordance with accrual concept and matching concept since bad debts are accrued in the period in which sales take place and bad debts expense match the sales recognised in the period.

ekkarill92 answered 1 year ago

What is the difference between direct write-off method and allowance method? Direct write-off method, a company...

What is the difference between direct write-off method and allowance method? Direct write-off method, a company does not anticipate bad debt expense. The allowance method is preferred over the direct write-off method because the accounts receivable will be presented on the balance sheet with a reduction called the allowance for doubtful accounts. Jan 1. At the beginning of the year, AA prepared the Aging of Accounts Receivable Schedule. Complete the table. Customer Amount Current Number of Days Past Due (Not...

Discuss the differences between the allowance method and the direct write-off method

Discuss the differences between the allowance method and the direct write-off method for recording uncollectible accounts. Which of the two is acceptable under financial accounting rules?

What is the difference between direct write-off method and allowance method?

What is the difference between the allowance method and the direct write-off method of accounting for...

What is the difference between the allowance method and the direct write-off method of accounting for uncollectible accounts and what are the advantages of using each method? Explain.

Explain the differences between the Direct Write- off Method and Allowance Method. Answer these questions: which...

Explain the differences between the Direct Write- off Method and Allowance Method. Answer these questions: which method is more accurate? which method is better at matching?

Allowance Method versus Direct Write-Off Method On April 12, Maddox Company, declared a $40,000 account receivable...

Allowance Method versus Direct Write-Off Method On April 12, Maddox Company, declared a $40,000 account receivable from the Ward Company as uncollectible and wrote off the account. On December 5, Maddox received a $28,000 payment on the account from Ward. a. Assume that Maddox uses the allowance method of handling credit losses. Prepare the journal entries to record the write-off and the subsequent recovery of Ward's account.< b. Assume that Maddox uses the direct write-off method of handling credit losses....

Compare and contrast the direct write-off method and the allowance method for bad debts. At a...

Compare and contrast the direct write-off method and the allowance method for bad debts. At a minimum, please consider the following in your answer: When is the expense for uncollected accounts receivable recognized under each method? Why is the direct write-off method not considered to follow generally accepted accounting

Microsoft Dynamics GP Write off an Uncollectible accounts receivable Under the allowance method, the write off...

Microsoft Dynamics GP Write off an Uncollectible accounts receivable Under the allowance method, the write off of a specific accounts receivable: 1. Decreases net income and decreases accounts receivable. 2. Decreases net income and decreases working capital. 3. Affects neither net income nor accounts receivable. 4. Affects neither net income nor working capital. 5. Increases bad debit expense and increases the allowance for doubtful accounts.

Allowance Method Review - The Allowance Method (GAAP) V. Direct Write-Off Method Nathans Corp., manufactures hot...

Allowance Method Review - The Allowance Method (GAAP) V. Direct Write-Off Method Nathans Corp., manufactures hot dogs, reports the following information before adjusting for 2010 Bad Debt Expense. Dr. Cr. Accounts Receivable……………………… $ 100,000 Allowance for Uncollectibles……..….. $ 10,000 Sales Revenue (all on credit)…………. $500,000 Sales Returns and Allowances……….. $100,000 Sales Discounts……………………………… $ 50,000 Valuation of Accounts Receivable – Allowance Method for Uncollectible Accounts Recording Bad Debts- Bases Used for Allowance Method - Please write the correct...

Compare and contrast the following: 1A) allowance method and the direct write-off method of accounting for...

Compare and contrast the following: 1A) allowance method and the direct write-off method of accounting for uncollectible accounts. 1B) accounts receivable and notes receivable. 1C) accounts receivable turnover ratio with previous ratios (i.e., inventory turnover ratio, gross margin percent, return on sales, return on assets and return on equity).

Question