Collection of Write-Offs

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There are two methods for writing off uncollectible accounts which include the direct write-off method and allowance method. Which method is most commonly utilized and what is the process for writing these accounts off under each method? Explain the entries that are made to record payment of an account that has previously been written-off?

Just response each posted down below only # 1 to 3.

Posted 1

Hello Professor ,

There are two methods for writing off uncollectible accounts which include the direct write-off method and allowance method. Which method is most commonly utilized and what is the process for writing these accounts off under each method? Explain the entries that are made to record payment of an account that has previously been written-off?

There are two different methods in accounting that can be used to write off uncollectible accounts one is the direct write off method , with the direct write off method there is no allowance but there is only accounts receivable and the accounts receivable is written off to expense once they identified an uncollectible account . The next method for writing off an uncollectible account is allowance for doubtful accounts this method is used for accrual based accounting .Under this method there is a reduction of the total amount of the accounts receivable , this is based on an estimate of an account of the uncollectible amount . The direct write off method is the preferred method for most companies because this method is required for filing federal income taxes .

Posted 2

Hi everyone,

The direct write-off method is a process used when entering an uncollectible account to increase Bad Debt Expense and decrease Accounts Receivable, as the uncollectible account is being eliminated. Debit the Bad Debt Expense and credit Accounts Receivable. “Under this method, Bad Debt Expense will show only actual losses from uncollectibles. The company will report accounts receivable at its gross amount”, (Kieso, D. E., et al., pg. 334). While the direct write-off method is frequently used due to its simplicity, convenience and for tax reasons, it is considered inadequate. In the case of a payment being received after the write-off, two entries are necessary. First, the uncollectible account must be put back in the books. Accounts Receivable should be debited and Bad Debt Expense, credited. Secondly, the payment transaction must be recorded. A debit should be made to Cash and a credit to Accounts Receivable.

The allowance method occurs at the end of each accounting period. Bad debt accounts are estimated, using prior reports and figures of the business’s unsettled receivables. This method is required by the FASB (Financial Accounting Standards Board), for reporting outstanding receivables with the use of three major aspects, according to Kieso, D. E., et al. (Intermediate Accounting, 16thEdition., 2016., pg. 334).

  1. Companies estimate uncollectible accounts receivable and compare the new estimate to the current balance in the allowance account.

  1. Companies debit estimated increases in un-collectibles to Bad Debt Expense and credit them to Allowance for Doubtful Accounts (a contra asset account) through an adjusting entry at the end of each period.

  1. When companies write off a specific account, they debit actual un-collectibles to Allowance for Doubtful Accounts and credit that amount to Accounts Receivable.

With the allowance method, if a payment is received after it has been written off, the original entry is reversed to restore the account. Accounts Receivable should be debited, and Allowance for Doubtful Accounts should be credited. Then, the collection is recorded as a debit of Cash and credit to Accounts Receivable.

The allowance method is a mandatory practice expected by the FASB. The direct write-off method is an easy way to manage bad debt when nonpayment is rare. However, this method violates the matching principle which states that expenses must be matched with revenue”, (Kristin, CPA., 2018).

Posted 3

Hello Professor and Class,

When a company is unable to collect debts on the accounts receivable, they can use either the direct write-off or the allowance method to record the losses. Under the direct write-off method, the Bad Debt Expense shows “only actual losses from uncollectible accounts” (Kieso, D. E., et al., pg. 333). Therefore, at the point of preparing the balance sheet, it is assuming that all the accounts receivable could be turning to cash. This could cause the assets being overstated on the report. Under this method, the losses will be recorded as a Bad Debt Expense (debit) and reduced the same amount directly to Accounts Receivable (credit). This also means the bad debt expense could occur in a later period than the revenue from the sale. In addition, if for some reason, the company is able to collect the bad debt expense from the previous period, they simply reverse the transaction in the current period. For these reasons, the direct write-off method “is not considered appropriate”.

On the other hand, the allowance method is more complex, but it follows the matching principle that the revenues are matched with the expenses incurred in the same period. Under this method, the company follows 3 steps. First, they estimate uncollectible accounts receivable which based on the previous periods or previous years’ experience. Next, they debit the estimated amount to the Bad Debt Expense and credit to an additional account, called Allowance for Doubtful Accounts (contra asset accounts). This is made at the end of each period. Finally, it is written off by debiting the allowance for doubtful accounts and crediting the accounts receivable (*). When they are able to collect the written-off amount, they reverse the (*) and make a collectible on accounts transaction by debiting cash and crediting AR. Although the allowance method is more commonly used by companies, the IRS only allows them to use the direct write-off method for income tax reporting.

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