Question

Early the following year (2020), the Company is told that one of its customers declared bankruptcy & cannot pay the $8,000 it owes. The $8,000 was part of the Company’s Accounts Receivable balance at December 31, 2019 (see preceding fact pattern immediately above). Prepare the adjusting journal entry to write off the $8,000 receivable (Remember, the Company uses the Allowance Method).

Answer 1

Solution: -

Allowance method: - To overcome disadvantages of direct write-off method Company uses Allowance method. It follows matching principle of accounting. Under Allowance method company records expenses in the same accounting period in which sales are made. For example, if sales are made in 2020 period than expenses related to this accounting period is also made in 2020 only. Company estimates amount of uncollectible on the basis of past records or on the basis of type of customers.

Write-off uncollectible account: - When company follows allowance method, the actual amount of uncollectible account will be write-off against the balance of allowance for doubtful account.

Prepare the adjusting journal entry to write off the $8,000 receivable: -

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