Explain why companies must use the Allowance Method, and not the Direct Write-Off Method, when dealing with collectible accounts. Then show a journal entry writing off an account with both methods. Note: Please see below as I don't believe what I came up with is detailed enough. Please include actual amounts for this problem. The amounts can be made up, but a journal entry utilizing both methods must be included. Let's assume that a corporation begins operations on November 1 in an industry where it is common to give credit terms of net 30 days. In this industry, approximately 0.3% of credit sales will not be collected. Next, let's assume that the corporation focuses on the bad debts expense. If the corporation's actual credit sales for November are $800,000, it will record an adjusting entry dated November 30 to debit the bad debts expense for $2,400 ($800,000 X 0.003) and credit an allowance for doubtful accounts in the amount of $2,400. As a result, its November income statement will be matching $2,400 of bad debts expense with the credit sales of $800,000. If the balance in accounts receivable is $800,000 as of November 30, the corporation will report accounts receivable (net) of $797,600. The direct write-off method involves writing off a bad debt expense directly against the corresponding receivable account. Therefore, under the direct write-off method, a specific dollar amount from a customer account will be written off as a bad debt expense. However, the direct write-off method can result in misrepresenting the income between reporting periods if the bad debt journal entry occurred in a different period from the sales entry. For such a reason, it is only permitted when writing off immaterial amounts. The journal entry for the direct write-off method is a debit to bad debt expense and a credit to accounts receivable. Dr. Bad debt expense xx Cr. Accounts Receivable xx Example: in the problem above, the 3% of the credit sales- $800,000 is considered uncollectible the entry would be: Debit Credit Bad debt expense 2,400 Accounts Receivable 2,400
Explain why companies must use the Allowance Method, and not the Direct Write-Off Method, when dealing with collectible accounts. Then show a
Let's assume that a corporation begins operations on November 1 in an industry where it is common to give credit terms of net 30 days. In this industry, approximately 0.3% of credit sales will not be collected.
Next, let's assume that the corporation focuses on the
The direct write-off method involves writing off a bad debt expense directly against the corresponding receivable account. Therefore, under the direct write-off method, a specific dollar amount from a customer account will be written off as a bad debt expense. However, the direct write-off method can result in misrepresenting the income between reporting periods if the bad debt journal entry occurred in a different period from the sales entry. For such a reason, it is only permitted when writing off immaterial amounts. The journal entry for the direct write-off method is a debit to bad debt expense and a credit to accounts receivable.
Dr. Bad debt expense xx
Cr. Accounts Receivable xx
Example: in the problem above, the 3% of the credit sales- $800,000 is considered uncollectible the entry would be:
Debit Credit
Bad debt expense 2,400
Accounts Receivable 2,400
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