In its first year of business, Rideaway Bikes has net income of $139,000, exclusive of any adjustment for bad debts expense. So far, no adjustments have been made to write off uncollectible accounts or to estimate bad debts. The relevant data are as follows: Write-offs of uncollectible accounts during the year $10,500 Net credit sales $650,000 Estimated percentage of net credit sales that will be uncollectible 2% Required: Under the direct write-off method, net income and under the allowance method, net income is$ The direct write-off method results in the higher net income but the method that should be used is the allowance method because this is the preferred method under accounting standards because it follows the matching principle The direct write-off method should only be used if the amount of bad debts is immaterial
Bad Debts
At the end of the accounting period, a financial statement is prepared by every company, then at that time while preparing the financial statement, the company determines among its total receivable amount how much portion of receivables is collected by the company during that accounting period.
Accounts Receivable
The word “account receivable” means the payment is yet to be made for the work that is already done. Generally, each and every business sells its goods and services either in cash or in credit. So, when the goods are sold on credit account receivable arise which means the company is going to get the payment from its customer to whom the goods are sold on credit. Usually, the credit period may be for a very short period of time and in some rare cases it takes a year.
Need help to answer the net income through the direct-write off method and the allowance method. Please show equations/calculations so I can see what to do.
Thank you in advance :D
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