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Gideon Company uses the allowance method of accounting for uncollectible accounts. On May 3, Gideon Company wrote off the $2,000 uncollectible account of its customer, A. Hopkins. On July 10, Gideon received a check for the full amount of $2,000 from Hopkins. The entry or entries Gideon makes to record the recovery of the bad debt is: Multiple Choi

Respuesta :

A. Hopkins, accounts Receivables $2,000 (debit)

⇒Bad debts expenditure (credit) $2,000

⇒Cash $2,000 (debit)

⇒ Hopkins, account Receivables $2,000 (credit)

Allowance method

  • At the end of each month, uncollectible accounts are estimated using the allowance technique of accounting for bad debts.
  • Ensures that receivables are shown on the balance sheet at their cash (net) realizable value and better aligns expenses and revenues on the income statement.
  • With the allowance technique, a reserve is set up for anticipated future bad debts. The reserve is calculated as a percentage of the sales made during the reporting period, with the potential for adjustments for the risk related to certain customers.

Why do people utilize the allowance method?

How much cash a company should set aside for potential future bad or unrecoverable customer debt is determined using the allowance technique. It takes into account the price of the losses a business anticipates from giving customers credit.

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