In: Accounting
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 Yet Due) | 1~30 | 30~60 | 60~90 | |||
CC | $ 10,000 | $ 10,000 | ||||
DD | 1,000 | $ 1,000 | ||||
EE | 2,000 | $ 2,000 | ||||
FF | 5,000 | |||||
GG | 3,000 | $ 3,000 | ||||
Total | $ 21,000 | $ 1,000 | $ 10,000 | $ 2,000 | $ 3,000 | |
Percentage considered uncollectible | 2% | 5% | 10% | 15% | ||
Estimated Uncollectible Accounts | ||||||
Jan 1. | AA had previous balance of Allowance for Doubtful Accounts ($170). | |||||
How much do they have to add to match the estimated uncollectible accounts that you calculated above? | ||||||
Jan 1. | Please complete the journal entry to add the amount that you calculated above to the allowance for D.A. | |||||
Date | Explanation | Debit | Credit | |||
Jan 1. | Post the allowance for doubtful accounts entries in T-account, and show the balance. | |||||
Don't forget the previous balance | ||||||
Allowance for Doubtful Account | ||||||
Mar. 1 | Company AA sold rooms to BB on account ($100). | |||||
Journalyze this transaction. | ||||||
Date | Explanation | Debit | Credit | |||
Mar. 31 | Company AA found that the account receivable for BB was uncollectible | |||||
Journalyze this transaction based on allowance method | ||||||
Date | Explanation | Debit | Credit | |||
April 5. | BB notified that they would pay cash for their debt. | |||||
Journalyze this transaction. | ||||||
Date | Explanation | Debit | Credit | |||
April 5. | AA received cash and cleared the receivable from BB | |||||
Journalyze this tranxaction. | ||||||
Date | Explanation | Debit | Credit | |||
Solution :
Computation of Allowance for Uncollectible Accounts | |||
Ageing | Accounts Receivables | % Uncollectible | Required Allowance |
Not yet due | $1,000.00 | 2% | $20.00 |
1-30 days | $10,000.00 | 5% | $500.00 |
30-60 days | $2,000.00 | 10% | $200.00 |
60-90 days | $3,000.00 | 15% | $450.00 |
Total | $16,000.00 | $1,170.00 |
Estimated uncollectible accounts = $1,170
Amount to be added to match the estimated uncollectible accounts = Estimated uncollectible accounts - Previous balance of allowance for doubtful accounts = $1,170 - $170 = $1,000
Journal Entries | |||
Date | Particulars | Debit | Credit |
1-Jan | Bad debts expense Dr | $1,000.00 | |
To Allowance for doubtful accounts | $1,000.00 | ||
(Being bad debts expense recorded) |
Allowance for doubtful Accounts | |||
Particulars | Debit | Particulars | Credit |
To ending balance | $1,170.00 | By Beginning balance | $170.00 |
By Bad debts expense | $1,000.00 | ||
Total | $1,170.00 | Total | $1,170.00 |
Journal Entries | |||
Date | Particulars | Debit | Credit |
1-Mar | Accounts receivables | $100.00 | |
To Sales revenue | $100.00 | ||
(To record sales) | |||
31-Mar | Allowance for doubtful accounts Dr | $100.00 | |
To Accounts receivables | $100.00 | ||
(To write off accounts receivables) | |||
5-Apr | Accounts receivables Dr | $100.00 | |
To Allowance for doubtful accounts | $100.00 | ||
(To reinstate customer account) | |||
5-Apr | Cash Dr | $100.00 | |
To Accounts receivables | $100.00 | ||
(To record collection from customer) |