When the allowance method is used, the write-off of an uncollectible account:
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Because customers do not always keep their promises to pay, companies must provide for these uncollectible accounts in their records. Companies use two methods for handling uncollectible accounts. The direct write-off method recognizes bad accounts as an expense at the point when judged to be uncollectible and is the required method for federal income tax purposes. The allowance method provides in advance for uncollectible accounts think of as setting aside money in a reserve account. The allowance method represents the accrual basis of accounting and is the accepted method to record uncollectible accounts for financial accounting purposes.  A YouTube element has been excluded from this version of the text. You can view it online here: pb.libretexts.org/llfinancialaccounting/?p=186 Direct Write-off The direct write-off method is used only when we decide a customer will not pay. We do not record any estimates or use the Allowance for Doubtful Accounts under the direct write-off method. We record Bad Debt Expense for the amount we determine will not be paid. This method violates the GAAP matching principle of revenues and expenses recorded in the same period. When we write-off an account under this method, the entry would be: Debit Credit Bad Debt Expense X Accounts Receivable X The amount used will be the amount the customer owes that we will not be able to collect. Allowance Method The allowance method follows GAAP matching principle since we estimate uncollectible accounts at the end of the year. We use this estimate to record Bad Debt Expense and to setup a reserve account called Allowance for Doubtful Accounts (also called Allowance for Uncollectible Accounts) based on previous experience with past due accounts. We can calculate this estimates based on Sales (income statement approach) for the year or based on Accounts Receivable balance at the time of the estimate (balance sheet approach). As a contra asset account to the Accounts Receivable account, the Allowance for Doubtful Accounts (also called Allowance for uncollectible accounts or Allowance for bad debts) reduces accounts receivable to their net realizable value. Net realizable value is the amount the company expects to collect from accounts receivable. When the firm makes the bad debts adjusting entry, it does not know which specific accounts will become uncollectible. Thus, the company cannot enter credits in either the Accounts Receivable control account or the customers’ accounts receivable subsidiary ledger accounts. If only one or the other were credited, the Accounts Receivable control account balance would not agree with the total of the balances in the accounts receivable subsidiary ledger. Without crediting the Accounts Receivable control account, the allowance account lets the company show that some of its accounts receivable are probably uncollectible. When we decide a customer will not pay the amount owed, we use the Allowance for Doubtful accounts to offset this loss instead of Bad Debt Expense. At the end of each year, we ESTIMATE bad debts expense and make the following entry: Debit Credit Bad Debt Expense X Allowance for Doubtful Accounts X The amount used will be the ESTIMATED amount calculated using sales or accounts receivable. When we write-off a customer account under the allowance method, the entry would be: Debit Credit Allowance for Doubtful Accounts X Accounts Receivable X Notice how we do not use bad debts expense in a write-off under the allowance method. Accounting in the HeadlinesLet’s try and make accounts receivable more relevant or understandable using an actual company. What does Coca-Cola’s Form 10-k communicate about its accounts receivable?Coca-Cola has several assets that are listed on its balance sheet. Let’s look at what is reported on Coca-Cola’s Form 10-K regarding its accounts receivable. A 10-K is another name for a company’s annual report. Additionally, a 10-Q is a company’s quarterly report. See the following excerpts from Coca-Cola’s 2013 Form 10-K:
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10.3: Direct Write-Off and Allowance Methods is shared under a not declared license and was authored, remixed, and/or curated by LibreTexts. When an account is written off using the allowance method for uncollectible accounts the?Answer and Explanation: When an account is written off using the allowance method, the: c. net accounts receivable will stay the same. Under the allowance method, a written-off account will result in an increase in the allowance for doubtful accounts and a decrease in net accounts receivable.
When an account is to be written off as uncollectible when the allowance method is used what account would be debited for the write off?When a specific customer's account is identified as uncollectible, the journal entry to write off the account is: A credit to Accounts Receivable (to remove the amount that will not be collected) A debit to Allowance for Doubtful Accounts (to reduce the Allowance balance that was previously established)
When using the allowance method the write off of a receivable ___?When the allowance method is used, the write-off of an account receivable results in an expense at the time of write-off. 20. Allowance for Doubtful Accounts is a contra account that is deducted from Accounts Receivable on the balance sheet.
Is allowance for doubtful accounts debited when uncollectible accounts are written off?When a doubtful debt turns into bad debt, businesses credit their account receivable and debit the allowance for doubtful accounts. However, the customers sometimes pay the amount written off as bad debts. When this happens, the balance sheet manager reverses the account by debiting the accounts receivable.
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