Principles of Accounting I Exam Review*Allowance for Doubtful Accounts(pg 377)The Allowance for Doubtful Accounts is a contra-asset account with anormal credit balance.To report the amount of accounts receivable which the businessexpects to collect on the balance sheet, the Allowance for DoubtfulAccounts is subtracted from the Accounts Receivable account.Accounts receivable is a current asset created when a salestransaction is executed on a credit basis.Accounts receivable does not include such receivables as loans toaffiliate companies or advances to employees.The credit department of a company is responsible for conductingcredit investigations of customers, establishing credit limits, andfollowing up on overdue accounts.The allowance method is designed to record the bad debts expensein the same accounting period as the related credit sale.When the allowance method is used, specific accounts are writtenoff by debiting the Allowance for Doubtful Accounts and crediting theAccounts Receivable account*Direct Write Off Method(page 391)Under the direct write-off method, uncollectible accounts arecharged to the bad debts expense in the period in which they aredetermined to be uncollectible.For most companies, the direct write-off method is not a generallyaccepted method of accounting for credit losses; however, mostcompanies use the direct write-off method for income tax purposes.U.S. GAAP does not permit the use of the direct write-off methodunless the amount of the credit losses is immaterial.*Credit Card Sales(pg 384)
Credit card fee expense is recognized when the credit card salestransaction is recorded.Credit card fee expense reduces the amount of cash received by thecompany from the credit card issuer.*Depreciation MethodsDepreciation is a cost allocation process; it allocates a plant asset’sdepreciable cost (acquisition cost less salvage value) in a systematicmanner over the asset’s estimated useful life.The most commonly used depreciation methods are straight-line,units-of-production, and declining-balance.Revisions of depreciation estimates are accomplished byrecalculating depreciation charges for current and subsequentperiods.When a plant asset is impaired, a loss is recognized equal to thedifference between the asset’s book value and its current fair value.*When is an asset considered to be impaired?