Sec 2 - Uncollectible - Direct Write-Off and Allowance

Question 1

Direct Write-off Method

Answer 1

• Rarely used, doesn’t conform to GAAP
• Does not match expenses with revenues
• When the account becomes uncollectible, it is written off to bad debt expense

An account is deemed uncollectible:
Bad Debt Expense XX (IS; Expense)
Accounts Receivable XX (BS)

An account previously written off is collected:
Cash XX (BS)
Bad Debts Recovered XX (IS; Revenue)

• Bad Debt Expense and Bad Debts Recovered are both income statement accounts.

Question 2

Allowance Method

Answer 2

Allowance Method

• The allowance is a contra account to AR
• Utilizes the matching principle and valuation of AR at NRV

End-of-period adjusting entry –

• The allowance for doubtful accounts is recorded at year-end because the identity of the specific accounts that will be uncollectible and written off in a later period is unknown.
• The account is contra to accounts receivable.

Bad Debt Expense XX (IS; Expense)
Allowance for Doubtful Accounts XX (BS; AR–contra)

• Allowance will have a beginning and ending balance used in calculation of expense.

Write-off of uncollectible accounts –

• This entry has _no effect on income or net assets or even *net* accounts receivable_ because the income effect of uncollectibles has already been recognized in the previous adjusting entry.
• The debit to the allowance decreases the allowance and thus increases net accounts receivable.
• The _credit to accounts receivable decreases net accounts receivable._

Allowance for Doubtful Accounts XX (BS; AR- contra)
Accounts Receivable XX (BS; AR

Recovery of accounts previously written-off –

• Two entries reinstate the allowance account and record cash received.

Accounts Receivable XX (BS)
Allowance for Doubtful Accounts XX (BS; AR-contra)
Cash XX (BS)
Accounts Receivable XX (BS)