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?

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 1 year ago

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