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 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.
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.
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Document Details
University
Lovely Professional University
Subject
Accounting