Two methods of accounting for uncollectible accounts are the direct write-off method and the allowance method.
Explanation:
Direct written-off method:
Here, the charging of bad debts in expense only when individual invoices are identified as uncollectible.
Allowance method:
Here, an estimate of future value of bad debt is charged in reserve account after a sale is completed.
Difference between direct write-off method and the allowance method:
Accuracy: The accurate amount of the bad debt expense is noted under direct write-off method as specific invoice is being noted, while only approximate value is charged off under allowance method.
Timing: The bad debt expense identification is delayed under direct write-off method, while it is quick under the allowance method.
Receivable line item: It is low under allowance method, since reserve is being evaluated against receivable amount.
Answer:
The correct answer is A: direct write-off method and the allowance method
Explanation:
Unfortunately, some sales on account may not be collected. Customers go broke, become unhappy and refuse to pay, or may generally lack the ethics to complete their half of the bargain. It is necessary to establish an accounting process for measuring and reporting these uncollectible items. Uncollectible accounts are frequently called “bad debts.”
There are two methods of accounting to manage uncollectible accounts:
1- Allowance method
2- Direct Write-off Method
2- Under this method, there is no allowance account. An account receivable is written-off directly to expense only after the account is determined to be uncollectible. This method is required for income tax purposes. The direct write-off method is easy to operate as it only requires that specific debts are written off as they are identified with a simple journal. The problem with the method, however, is that it does not comply with the matching principle, in that revenue might be recorded in one period, when the customer is invoiced, whereas the expense of writing off the uncollectible amount is recorded in a completely different period when the amount is identified as irrecoverable.
