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Question: What are the essential features of the allowance method of accounting for bad debts?
Answer: The firms would in general try to sale the inventory on cash terms but in order to maximize the sales they allow credit. Thus account receivable is created.
There are two methods of for recording uncollectible accounts
(1) Direct write off method
(2) Allowance method.
1. Direct Write-off Method--the direct write-off method recognizes bad debt expense in the period in which the account receivables prove to be uncollectible. When a specific account receivable has been proved to be uncollectible, the loss is recorded by debiting bad debt expense and crediting accounts receivable.
Under direct write off method bad debt expenses are recorded in the year in which accounts receivable actually prove bad or unrecoverable. In other words it is determined that the receivables are no longer collectable in spite of all efforts of their collection.
In this case bad debts expense is recognized and specific account receivable is written off and eliminated from the books of accounts. Assuming that an account receivable for $1400 is not recoverable and Bad debts are written off, the following entry is recorded.
Date Details Debit Credit
Dec 31 Bad Debts Expense ...
This solution discusses the essential features of the allowance method of accounting.