DQ1, How would you describe the entries to record the disposition of accounts receivables? What is their function? day 2
The account receivable is disposed off when they are received in cash and the entry is made to close the account receivable control account and the customer individual account. After passing the entry the account receivable is converted into cash. The account receivable may be disposed off if they are not received for any reason, at this time the account receivable account is closed against bad debts expense or allowance for bad debts accounts.
DQ2, How are bad debts accounted for under the direct write-off method? What are the disadvantages of this method? day 3
Under the direct write off method, the bad debts expenses are recorded when the customer does not pay its due amount to the company, as no allowance for doubtful debts is maintained under this method. It is used where most of the customers are good and they normally pay within time period. But for some reason, like death or bankruptcy, the customer could not pay its due amount. As there is no allowance or provision is kept for bad debts therefore it does not follow the matching principle of account as the bad debt expense should be recorded for the period for which sales had been made.
DQ3, Why would you select the percentage of sales method for calculating doubtful accounts instead of the percentage of receivables method? day 4
Allowance for uncollectible accounts may be created by using income statement approach which is also known as credit sales percentage method. In this method some specific percentage of credit sales is set to determine allowance for the period. In it, the previous balance of allowance for uncollectible expense is not considered; therefore it is easy to use. For example, if a company has made total sales in the period amounted to $2 million, account receivable is $200000 and allowance for uncollectible account has credit balance of $2000 at year end. Under income statement approach, the rate is 1% and under balance sheet approach the rate is assumed to be 5% of year end account receivables balance. The amount of bad debt expenses under first method will be simple 1% of 2 million which is $20000, the previous balance of allowance for uncollectible expense is ignored, while under the second method the 5% of 200000 will be 10000 and the previous balance will be deducted, therefore the bad debt expense for the period will be $8000. The company use income statement approach for monthly reporting purpose, while at the year end the reporting is done based on balance sheet approach, as it seems more logical that there is no need to create an allowance for that money from credit sales which have been