Question

What two methods exist for adjusting for uncollectible accounts receivable? Which is acceptable under GAAP?

Answer 1

The two methods for adjusting uncollectable accounts receivable are as follows:

1) Direct write off method:

When the company identifies uncollectable amount, such amount shall be treated as expenditure and shall be recuced from the accounts receivable. For example the total accounts receivable is $100,000 and it was determined that it is uncollectable, it shall be treated as expense and accounts receiveble shall be reducted by the following entry:

Debit bad debt expenditure $100,000

Credit Accounts receivable $100,000

2) Allowance method:

This is the second method in which the uncollectable amount is not directly treated as expenditure. A specific percentage of uncollectable amount to sales shall be determined and an allowance shall first be created. In future it shall be written off.