Question

what is the benefit of using an Allowance Method of accounting for uncollectable accounts versus using...

what is the benefit of using an Allowance Method of accounting for uncollectable accounts versus using the direct write-off method?

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Answer #1

Following are the benefit

  • under allowance method, we create a contra account by crediting it with the estimated doublful amount. Thus accounts receivable are reduced without having to credit this account.
  • it shows the true and fair view of the financial statements because the doubtful amount is only the estimated amount and therefore directly writing it off is not right.
  • The prudence and conservatism principle postulates that if there is any probable expense, it need be immediately charged to profit & loss account which is done under the allowance method.
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