Question

1. Which of the three methods (Percent of Sales, Percent of Receivables or Aging of Accts Receivable) used to estimate the Allowance for Bad Debts is more accurate? Explain your reasoning.

2. When using the Allowance method for accounting for uncollectible accounts, why do we debit the Allowance for Bad Debts when writing off a specific account as uncollectible?

Answer 1

THREE METHODS USED TO ESTIMATE THE ALLOWANCE FOR BAD DEBT

1)

PERCENT OF SALES ;

IN THIS METHOD RECORDING BAD DEBT EXPENSE IS BY USING THE PERCENT OF CREDIT SALES APPROACH.

THIS APPROACH AUTOMATICALLY EXPENSES A PERCENTAGE OF ITS CREDIT SALES BASED ON PAST HISTORY.

DATE

JOURNAL ENTRY

DEBIT

CREDIT

BAD DEBT EXPENSE A/C

ALLOWANCE FOR DOUBTFULL ACCOUNTS A/C

AGING OF ACCOUNT RECEIVABLE ;

THIS METHOD REPORTS TYPICALLY GENERATED BY SORTING UNPAID SALES INVOICES IN THE SUBSIDIARY LEDGER-

FIRST BY CUSTOMER THEN BY THE DATE OF SALE INVOICES. IF THE COMPANY SELL PRODUCTS OR PROVIDE SERVICES

GIVING A OPPORTUNITY THE CUSTOMER TO PAY 30 DAYS LATER, IT WILL INDICATE HOW MUCH OF ITS ACCOUNTS -

RECEIVABLE IS PAST DUE.

I THINK THE SECOND ONE IS BETTER , BECAUSE THERE IS A SUBSIDIARY LEDGER FOR ALL CUSTOMERS TO KNOW AND TRACK

HOW MUCH RECEIVABLE, RECEIVED AND DUE, SO IT PROVIDE A CLEAR PICTURE ABOUT BAD DEBTS AND ALL RELATED TO THIS

2)

ALLOWANCE METHOD FOR ACCOUNTING ;

UNDER THIS METHOD , IF A SPECIFIC CUSTOMER ACCOUNT RECEIVABLE IS IDENTIFIED AS UNCOLLECTABLE ,IT IS WRITTEN OFF-

BY REMOVING THE AMOUNT FROM ACCOUNT RECEIVABLES.

THE ENTRY TO WRITE OFF A BAD ACCOUNT AFFECT ONLY BALANCE SHEET ACCOUNTS.

A DEBIT TO ALLOWANCE FOR DOUBTFULL ACCOUNTS AND A CREDIT TO ACCOUNT RECEIVABLE.

NO EXPENSE OR LOSS IS REPORTED ON THE INCOME STATEMENT BECAUSE THIS WRITE OFF COVERED

UNDER THR EARLIER ADJUSTING ENTRIES FOR ESTIMATED BAD DEBTS EXPENSE.

Debit the Allowance for Bad Debts when writing off a specific account as uncollectible ;

A DEBIT TO ALLOWANCE FOR DOUBTFULL ACCOUNTS AND A CREDIT TO ACCOUNT RECEIVABLE.

(RECORDING CREDIT LOSSESS ,

WRITE OFF CUSTOMER ACCOUNTS IN THE JOURANAL ENTRY LIKE ; )

DATE

JOURNAL ENTRY

DEBIT

CREDIT

ALLOWANCE FOR DOUBTFULL DEBTS A/C

ACCOUNT RECEIVABLE A/C