Comparison of the Allowance and Direct Write - Off Methods for Accounting for Bad Debts ACC 205 Week 4 DQ2 Receivables. Discuss the allowance method and the direct write - off method of accounting for bad debts. When is the expense for uncollected accounts receivable recognized under each method? Estimating Bad Debts — Allowance Method Percentage of total accounts receivable method . One way companies derive an estimate for the value of bad debts under the allowance method is to calculate bad debts as a percentage of the accounts receivable balance. If a company has $100,000 in accounts receivable at the end of an accounting period and company records indicate that, on average, 5% of total accounts receivable become uncollectible, the allowance for bad debts account must be adjusted to have a credit balance of $5,000 (5% of $100,000). Unless actual write - offs during the just - completed accounting period perfectly matched the balance assigned to the allowance for bad debts account at the close of the previous accounting period, the account will have an existing balance. If write - offs were less than expected, the account will have a credit balance, and if write - offs were greater than expected, the account will have a debit balance. Assuming that the allowance for bad debts account has a $200 debit balance when the adjusting entry is made, a $5,200 adjusting entry is necessary to give the account a credit balance of $5,000.