Review the below illustration table and express your opinion on the following theme:

1) What are the advantages and disadvantages of both bad debts methods?

2) Which method is required by GAAP rule?

3) Provide your answer and comments for the following multiple-choice question.

According to GAAP, the amount of bad debt expense can be estimated by:

A. Only the percent of sales method.

B. Only the percent of accounts receivable method.

C. Only by the aging of accounts receivable method.

D. Only by the percent of sales method or the percent of accounts receivable method.

E. Bad debt expense can be estimated by the percent of sales method, the percent of accounts receivable method, or by the aging of accounts receivable method.

Transcribed Image Text:

METHODS OF ACCOUNTING FOR BAD DEBTS DIRECT WRITE-OFF METHOD ALLOWANCE METHOD At the end of cach accounting period, bad debts expense is Accounts for bad debts from an uncollectible account receivable at the time account is determined to be uncollectible. estimated and recorded. Adjusting entry required: Bad Debt Expense XXX Allowance for Uncollectible Accounts (The amount is an estimate based on a percentage of sales or a percentage of outstanding accounts receivable. If the estimate is based on sales, the full estimate is used in the adjusting entry. If the estimate is based on accounts receivable the allowance account balance is brought to the amount of the estimate.) Write-off entry required: XXX Year-end No adjusting entry When an account is Write-off entry required: Bad Debts Expense determined to be хXX Allowance for Uncollectible Accounts XXX uncollectible Accounts Receivable/Customer XXX Accounts Receivable/Customer XXX (The amount is the balance of the uncollectible account.) 1. Reinstate account by reversing write-off: (The amount is the balance of the uncollectible account.) 1. Reinstate account by reversing write-off: Accounts Receivable/Customer XXX Accounts Receivable/Customer хXX When an account Bad Debts Expense (The amount is the account balance that was written off.) 2. Record collection on account normally: Cash хXX Allowance for Uncollectible Accounts XXX previously written off is recovered (The amount is the account balance that was written off.) 2. Record collection on account normally: хXX Cash XXX Accounts Receivable/Customer XXX Accounts Receivable/Customer XXX (The amount is the amount collected.) (The amount is the amount collected.) METHODS OF ACCOUNTING FOR BAD DEBTS DIRECT WRITE-OFF METHOD ALLOWANCE METHOD At the end of cach accounting period, bad debts expense is Accounts for bad debts from an uncollectible account receivable at the time account is determined to be uncollectible. estimated and recorded. Adjusting entry required: Bad Debt Expense XXX Allowance for Uncollectible Accounts (The amount is an estimate based on a percentage of sales or a percentage of outstanding accounts receivable. If the estimate is based on sales, the full estimate is used in the adjusting entry. If the estimate is based on accounts receivable the allowance account balance is brought to the amount of the estimate.) Write-off entry required: XXX Year-end No adjusting entry When an account is Write-off entry required: Bad Debts Expense determined to be хXX Allowance for Uncollectible Accounts XXX uncollectible Accounts Receivable/Customer XXX Accounts Receivable/Customer XXX (The amount is the balance of the uncollectible account.) 1. Reinstate account by reversing write-off: (The amount is the balance of the uncollectible account.) 1. Reinstate account by reversing write-off: Accounts Receivable/Customer XXX Accounts Receivable/Customer хXX When an account Bad Debts Expense (The amount is the account balance that was written off.) 2. Record collection on account normally: Cash хXX Allowance for Uncollectible Accounts XXX previously written off is recovered (The amount is the account balance that was written off.) 2. Record collection on account normally: хXX Cash XXX Accounts Receivable/Customer XXX Accounts Receivable/Customer XXX (The amount is the amount collected.) (The amount is the amount collected.)

Answer rating: 100% (QA)

1 Direct write off method Advantage Easy to maintain accounting records Disadvantage Th... View the full answer