Question

Describe the Direct Write off and Allowance methods of accounting for bad debts, including use of Balance Sheet and Percentage of Sales calculations. Give examples (NOT from the textbook) of journalizing reinstatement and collection of a previously written-off account.

Answer 1

Direct Write off: Under this method, actual bad debts would be recorded. This method is used in the federal income tax.

Allowance methods of accounting for bad debts: Under this method, you will need to estimate the amount that will not be realized in the future using the past data.

Let's take an example.

During the year 2019, Your company have sale of $500,000 on account. Using the past data, you obtains the 2% of credit sales will not be realized in the future.

Company is received cash of $400,000 from customers.

However, one of the customers has due of $8,000 to your company and this amount is not realized because the customer becomes bankrupt.

Under direct method:-

Event	General Journal	Debit	Credit
1	Accounts receivable	500,000
	Sales revenue		500,000
	(To record sales revenue on account.)
2	Cash	400,000
	Accounts receivable		400,000
	(To record cash received from account.)
3	Bad debts expense	8,000
	Accounts receivable		8,000
	(To record accounts Write off.)

Partial income statement
Expenses:
Bad debts expense	8,000
Partial balance sheet
Assets
Current assets
Accounts receivable (500000-400000-8000)	92,000

Allowance methods of accounting for bad debts:-

Event	General Journal	Debit	Credit
1	Accounts receivable	500,000
	Sales revenue		500,000
	(To record sales revenue on account.)
2	Cash	400,000
	Accounts receivable		400,000
	(To record cash received from account.)
3	Allowance for Doubtful Accounts	8,000
	Accounts receivable		8,000
	(To record accounts Write off.)
4	Bad debt expense	10,000
	Allowance for Doubtful Accounts		10,000
	(To record bad debts expense.) (500000*2%)

Partial income statement
Expenses:
Bad debts expense	10,000
Partial balance sheet
Assets
Current assets
Accounts receivable (500000-400000-8000)	92,000
Less: Allowance for Doubtful Accounts (10000-8000)	2,000
Accounts receivable, net	90,000