Uncollectible- Direct Write-off and Allowance

Question 1

What are the two methods for uncollectible?

Answer 1

Direct Write-Off method- GAAP doesn’t allow this method unless there is evidence of no bad debt. It does not match revenues with expenses. Doesn’t show A/R at Net Realizable Value

Allowance

Question 2

Two ways to estimate allowance for uncollectible accounts:

Answer 2

1) Income statement approach

2) Balance sheet approach

Question 3

What is the income statement approach?

Answer 3

Estimate uncollectible balance as a percentage of sales

*Credit Sales X % of sales Uncollectible = Bad Debt Expense

Question 4

What is the balance sheet approach

Answer 4

Directly calculated the ending balance of the allowance account

• A/R X % of AR Uncollectible = Balance in the allowance account

Question 5

What is the journal entry to perform a write-off when you use the allowance method?

Answer 5

Allowance for doubtful accounts (DR) 
Accounts Receivable (CR)