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ACC 205 Comparison of the Allowance and Direct Write-Off Methods for Accounting for Bad Debts

A comparison of two accounting methods used to manage bad debts in financial reporting.

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Comparison of the Allowance and Direct Write-Off Methods for Accounting for Bad DebtsACC 205Week 4 DQ2Receivables. Discuss the allowance method and the direct write-off method of accounting forbad debts. When is the expense for uncollected accounts receivable recognized under eachmethod?Estimating Bad Debts—Allowance MethodPercentage of total accounts receivable method. One way companies derive an estimate forthe value of bad debts under the allowance method is to calculate bad debts as a percentage ofthe accounts receivable balance. If a company has $100,000 in accounts receivable at the end ofan accounting period and company records indicate that, on average, 5% of total accountsreceivable become uncollectible, the allowance for bad debts account must be adjusted to have acredit balance of $5,000 (5% of $100,000).Unless actual write-offs during the just-completed accounting period perfectly matched thebalance assigned to the allowance for bad debts account at the close of the previous accountingperiod, the account will have an existing balance. If write-offs were less than expected, theaccount will have a credit balance, and if write-offs were greater than expected, the account willhave a debit balance. Assuming that the allowance for bad debts account has a $200 debitbalance when the adjusting entry is made, a $5,200 adjusting entry is necessary to give theaccount a credit balance of $5,000.

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Document Details

University
Lovely Professional University
Course
ACC 205
Subject
Accounting

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