Question

1. 1. Using your own words, explain how the direct write-off method and the allowance method applied in accounting for uncollectible accounts receivables?
2. 2. Give me an explanation of the difference between revenue expenditures, and capital expenditures, and how they are recorded in the accounting system using your own words.

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Answer 1

Using your own words, explain how the direct write-off method and the allowance method applied in accounting for uncollectible accounts receivables?

1.         Direct write off method. - Under this method, accounts receivables are written off wholly. The lump sum amount is charged and written off as uncollectible or once it becomes uncollectible.

2.         Allowance method: - Under allowance method, provision equal to the amount uncollectible is made in the books of accounts and then thereafter.

Direct Write off method better matches expense with revenue because it is based on matching principles. Direct write off is more realistic because when the bad debts is uncollectible. It directly reduces the accounts receivable.

Allowance methods; to overcome the limitation of direct write off method, Allowance method is used .It records the bad debts at the end of the accounting period in which the sale has been made. Therefore it follows the matching principle. Under allowance method estimation is required and management could over-estimate the amount of uncollectible accounts or underestimate the uncollectible accounts. The estimation of uncollectible accounts depends upon the judgment of the management and it depends whether the management requires high or low earnings. For example, if the company’s current year is very profitable, then the management by over-estimating the amount of bad debts could record a higher allowance and expense, thereby reducing the current year income. Similarly in the next year when the earnings are low, and then they could under- estimate the allowance, thereby recording less expense and increase their earnings.

Give me an explanation of the difference between revenue expenditures, and capital expenditures, and how they are recorded in the accounting system using your own words.

Capital expenditure is that expenditure which has been incurred to increase the value at which a fixed or capital asset may properly be carried in the books. In other words, Capital expenditure is that expenditure which helps in increasing the productive capacity. On the other hand revenue expenditure is that expenditure that is immediately charged against revenues as an expense. If repair and maintenance increases the productivity of the asset then it is to be added to the cost of asset and shown in the balance sheet. Otherwise it is to be debited to Income statement and treated as an expense Following are the differences between the capital and revenue expenditure.

Sr. No.	Capital Expenditure	Revenue Expenditure
1.	It helps in increasing productive capacity	It is routine nature expense and has no effect on production capacity
2.	It helps to increase earning capacity	It is incurred for earning profits
3.	Benefits accrue for more than one year or for long term	Benefits accrue for one year only
4.	It is shown in balance sheet	It is charged against profits
5.	It is charged to specific account in balance sheet	No specific account to be determined
6.	As amount is charged to specific account, such cost is amortized over a period	No amortization is done and whole amount is charged to income statement.