Direct Write-off over the Allowance Method

Ideally, there are two methods used in accounting for uncollectible accounts – direct write-off method and the allowance method for writing off accounts. Based on the video and chapter nine on accounting for receivables, there are various primary advantages and disadvantages of applying the direct write-off over the allowance method of writing off accounts. More specifically, when using direct write-off method, a bad debt is charged to expenses as soon as it becomes clear that the invoice will not be paid (Weygandt, 2013). One advantage of using a direct write-off method allows companies to have a single journal entry where bad debt expense only shows the actual losses from uncollectibles and accounts receivables as the gross amount. One disadvantage of using the direct write-off method is that it does not match bad debts expense with sales revenues or show account receivables on the balance sheet, which makes it unsuitable for financial reporting. On the other hand, the allowance method allows bad debt to be reserved in an account as soon as a sale is made. The advantage of using the allowance method is that it allows better matching on the income statement. Unfortunately, only an estimate of the bad debt expense is known under allowance method.

Allowance for Doubtful Accounts

The allowance for doubtful accounts represents the reduction for total amounts of accounts receivables on a company’s balance sheets (Kimmel, Weygandt, & Kieso, 2009).). The allowance for doubtful accounts is the best estimate of the amount of accounts that the company predicts will not be paid. Critics claim that estimating the allowance for doubtful accounts provides an opportunity to distort the gross income. However, this is not possible because the bad debts are debited to the Bad Debts Expense and the amount used to offset the doubtful accounts is charged to the expense account. The company still have records of the doubtful accounts, which acts as a reference point.

References

Kimmel, P. D., Weygandt, J. J., & Kieso, D. E. (2009). Accounting: Tools for business decision making. New Jersey: John Wiley & Sons, Inc.

Weygandt, J. J. (2013). Accounting Principles, PSSG Volume I, 11th Edition. John Wiley & Sons.