Question

Please explain to your classmates why the allowance method is the preferred method of recording uncollectible accounts.

Answer 1

Receivables include all money claims against other entities, including people, companies and other organizations.

Account Receivable is created when merchandise are sold on credit. They are classified as current assets on the balance sheet.

When customers do not pay the account receivables then the receivables are classified as uncollectible.

Two methods of accounting for uncollectible receivables are as follows:

1. Direct Write-off method: Records bad debts expense only when an account is determined to be worthless.

2. Allowance Method: Records Bad debts expense by estimating uncollectible accounts at the end of the accounting period.

Allowance method set aside a portion of the receivable as bad debt giving a clear picture of the Income statement and also balance sheet as the receivables are more realistic because net receivables are shown more correct.