When a firm provides for credit losses under the allowance method, why is the allowance for...

When a firm provides for credit losses under the allowance method, why is the allowance for doubtful accounts credited rather than accounts receivable?

Solutions

Expert Solution

Under Allowance method, when a firm provides for Credit losses, the Allowance for doubtful accounts is credited rather than accounts receivables, because it is not like ‘direct write off method’.
Allowance for Doubtful accounts is a ‘contra asset’ account having a credit balance.

It’s balance shows the expected amount of accounts receivables that will not be recovered. The firms assumes and estimates a percentage or amount and provides for the same on the basis of that assumption. It makes a Provision that this much accounts receivables will not be recovered.

This is why when provision is made, Allowance account is credited. HOWEVER, when an accounts receivables actually turn out to be uncollectible, then Allowance account is DEBITED and ACCOUNTS RECEIVABLES account is CREDITED.
Allowance method of Bad Debts accounting summarised:

>When estimated provision is made: Allowance for Doubtful Account is credited.
>When an accounts receivables actually become uncollectible, and has to be written off: Allowance for Doubtful account is debited (and Accounts receivables is credited).

ekkarill92 answered 8 months ago

Next > < Previous

Related Solutions

How do the allowance method and the direct write-off method of handling credit losses differ with...

How do the allowance method and the direct write-off method of handling credit losses differ with respect to the timing of bad debts expense recognition?

Under the allowance method for uncollectible accounts

Under the allowance method for uncollectible accounts (a) the net realizable value of accounts receivable is greater before an account is written off than after it is written off. (b) Bad Debts Expense is debited when a specific account is written off as uncollectible. (c) the net realizable value of accounts receivable in the statement of financial position is the same before and after an account is written off. (d) Allowance for Doubtful Accounts is closed each year to Income...

Computing Bad Debts Under the Allowance Method Based on Receivables A company has a credit balance...

Computing Bad Debts Under the Allowance Method Based on Receivables A company has a credit balance of $480 in its allowance for doubtful accounts. The amount of credit sales for the period is $64,000, and the balance in accounts receivable is $12,000. Assume that the expected credit losses are estimated to be 9% of accounts receivable. a. What is (1) bad debt expense for the year and (2) the ending balance in the allowance for doubtful accounts? 1. Bad Debt...

1. Under the allowance method, when a specific account is written off total assets will be...

1. Under the allowance method, when a specific account is written off total assets will be unchanged. net income will decrease. total assets will increase. total assets will decrease. 2. Blossom Company uses the percentage of receivables method for recording bad debts expense. The accounts receivable balance is $310000 and credit sales are $3110000. Management estimates that 4% of accounts receivable will be uncollectible. What adjusting entry will Blossom Company make if the Allowance for Doubtful Accounts has a credit...

1)Under the allowance method, when an account is written off, total assets decrease True False 2)In...

1)Under the allowance method, when an account is written off, total assets decrease True False 2)In a period of rising prices LIFO produces the highest cost of goods sold and the lowest gross profit. True False 3)Which of the following characteristics is not common to both tangible and intangible assets? Have an expected life of more than one year May have value only to a particular company Held for use and not for investment Derive value from the ability to...

Castle Company provides estimates for its uncollectible accounts. The allowance for uncollectible accounts had a credit...

Castle Company provides estimates for its uncollectible accounts. The allowance for uncollectible accounts had a credit balance of $17,780 at the beginning of 2021 and a $23,410 credit balance at the end of 2021 (after adjusting entries). If the direct write-off method had been used to account for uncollectible accounts (bad debt expense equals actual write-offs), the income statement for 2021 would have included bad debt expense of $18,100 and revenue of $3,200 from the collection of previously written off...

Under the allowance method for estimating uncollectible accounts, the entry to write off an account: A)...

Under the allowance method for estimating uncollectible accounts, the entry to write off an account: A) reduces total assets B) reduces net income C) has no effect on total assets D) increases net income Why is the answers c) I dont not understand since a write off would credit account receivable ( assets) and debit allowance of doubtful account.

Describe the two methods of accounting for bad debts under the allowance method (not the direct...

Describe the two methods of accounting for bad debts under the allowance method (not the direct write off method used on tax returns). Include how we estimate the allowance needed under one of the methods and how we account for write offs and recoveries of write offs.

why is the allowance method preferred over the direct write off method? Explain in detail.

Under the allowance method of uncollectible accounts, how does the adjusting entry to estimate the amount...

Under the allowance method of uncollectible accounts, how does the adjusting entry to estimate the amount that will become uncollectible affect the accounting equation?

Subjects