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ACC 205 Week 4 Discussion Question 2

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ACC 205 Week 4 Discussion Question 2
Discuss the allowance method and the direct write-off method of accounting for
bad debts. When is the expense for uncollected accounts receivable recognized
under each method? Respond to at least two of your classmates’ postings.
The allowance way of accounting for bad debt entails creating of a contra account to
accommodate estimations of uncollectable accounts receivable for that period of time.
The main advantage of the allowance way is that it supports the matching rule by

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booking estimated expenditures in the same period of time as the income. Evaluation of
uncollectable accounts can be achieved as a simple percentage of sales computation or
classifying debt depending on the period of accounts receivable. I am employed in
medical care and we normally categorize our accounts receivable into age brackets, 30
days, 45 days, 60 days and 90+ days. We assess bad debt depending on visible
tendencies for every period of time. The age of debt in accounts receivable is used as
the key indication of fiscal health and is monitored carefully. In case the level of
receivables in 60 day or over enhances it becomes a cause for internal diagnostics in
our income cycle.
The direct write-off way accounts for the cost of a bad debt account if the company
makes a decision that the account is uncollectable. The drawback to this technique is
that the expenditure might not be realized in the same period of time as the expected
income that is unsupportive of the matching rule. This technique overstates accounts
receivable, and doesn't let matching of income and expenditure.
The allowance method would be the main accounting method in the majority of
industries which sell on account. The direct write off method would be most appropriate
to small companies and companies that do not provide credit.

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