Question

Explain the difference between the allowance method and the direct write off method for accounts receivable. Document the method used for each of the three companies.

Answer 1

Answer:

Under the direct write-off method, a bad debt expense is only charged when it is evident or very likely that a note receivable will not be paid. Under this method, the bad debt expense is an exact amount, and it is only recorded after the sale is made.

Under the allowance method, bad debt expenses are recorded at the same time the sale is made, based on an estimate or average of the bad debt expenses that the company has had before. This method is less accurate because the bad debt is an estimate, not a specific amount.