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? Respond to at least two of your classmates' postings.
The allowance method takes a percentage of every sale or service and moves it to the allowance for uncollectibles account and to the uncollectible expense. This method goes ahead and accounts for their bad debt right when the service or sale takes place. This is good because the debt is recorded at the time of revenue. As for the direct write-off method, the bad debt is not recorded into the uncollectible expense until it has been decided to write it off. This is easier to keep up with in my opinion but it is not good when it comes to matching.
Most businesses have to deal with customers that open lines of credit with the company and they never pay their debits back. This debt is called bad debt. There are two methods a company can use. They are allowance and direct write-off methods.
Allowance method is preferred because the bad debts are matched to the principle of accounting. The bad or suspicious debts are estimated as expenses and recognized before the debts become uncollectible. For instance, an established company can rely on past experience to help them estimate bad debt so they can gage or estimate the bad debt before it happens.
Direct write-off method takes uncollectible accounts receivable and directly writes them off against income at the time they are actually determined as bad debts and they do not use any allowance or reserve accounts. For instance, the company will make several attempts to collect their money owed by sending out collection notices. When these attempts fail they are recognized as bad debt and the direct write-off method starts.
Reply to first posting:
You are correct that the direct write-off method is easier to maintain. It is also the only method which Congress permits a company which sells goods (as opposed to services) to use in order to write-off bad debts for tax purposes. I believe that Congress would not allow a company to use the allowance method because that method is too easy to manipulate. ...
This solution discusses the relative merits of the allowance method of accounting for uncollectible accounts versus the direct write-off method. It is a good theoretical foundation for a student trying to understand this method.