Questions and Answers
Which method of accounting for uncollectible is required if uncollectible accounts are probable and estimable?
The Allowance Method
What is the Direct Write-Off Method?
Direct write off records bad debt expense only when a specific account receivable is considered uncollectible and is written off. Direct write-off method is rarely used.
What does The Allowance Method do?
Determine the amount uncollectible and provide an Allowance to measure accounts receivable at net realizable value.
What are the preferred methods of accounting for uncollectible accounts receivable?
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Study Notes
Accounting for Uncollectible Accounts
- Allowance Method: Required when uncollectible accounts are probable and estimable. This method estimates bad debts in advance and aligns with matching principles.
- Direct Write-Off Method: Bad debt expense is recorded only when a specific account is deemed uncollectible. This method is less common and may not adhere to GAAP principles as it does not match expenses with revenues.
- Net Realizable Value: The Allowance Method measures accounts receivable (AR) at this value by estimating uncollectible amounts, ensuring more accurate financial statements.
- Preferred Approach: The Allowance Method is favored for accounting for uncollectible accounts over the Direct Write-Off Method due to better adherence to accounting standards.
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Description
This quiz focuses on the methods of accounting for uncollectible accounts, specifically the Allowance Method and Direct Write-Off Method. Test your knowledge on when to apply these methods and their definitions. Perfect for students studying accounting principles!
