Managing Uncollectible Accounts: Direct Write-Off vs. Allowance

Some accounts receivable become uncollectible. • Losses from these uncollectible accounts are debited to an account calledBad Debts Expense. 1. Direct write off method:Dr. Bad Debts ExpenseCr. ARBad method2. Allowance method Dr. Bad Debts Expense Cr. Allowance for Doubtful Accounts Usually use this, this is based on estimates, the purpose is to match the revenues and expenses to the same accounting year, (the matching principle) Estimating uncollectible accounts for the allowance method 1. Percentage of total receivables:• management estimates the percentage ofoutstanding receivables that will result inlosses from uncollectible accounts.• Example: uncollectible accounts are expected to be 4% of the accounts receivables. 2. Aging the accounts receivable method: • classifies the outstanding accounts by age and applies percentages to these categories based on past experience. Total estimated uncollectible account: 31,000. ADA has an unadjusted credit balance of $1,000. Prepare the required journal entry Dr. BDE 30,000 Cr. ADA 30,000