current-assets-part-ii

The appropriate entry for the direct write off

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Unformatted text preview: ite-off approach is as follows: 2-10-X7 *** Uncollectible Accounts Expense Accounts Receivable 500 500 To record the write off of an uncollectible account from Jones Notice that the preceding entry reduces the receivables balance for the item that is uncollectible. The offsetting debit is to an expense account: Uncollectible Accounts Expense. While the direct write-off method is simple, it is only acceptable in those cases where bad debts are immaterial in amount. In accounting, an item is deemed material if it is large enough to affect the judgment of an informed financial statement user. Accounting expediency sometimes permits “incorrect approaches” when the effect is not material. Recall the discussion of nonbank credit card charges above; there, the service charge expense was recorded subsequent to the sale, and it was suggested that the approach was lacking but acceptable given the small amounts involved. Again, materiality considerations permitted a departure from the best approach. But, what is material? It is a matter of judgment, relating only to the conclusion that the choice among alternatives really has very little bearing on the reported outcomes. You must now consider why the direct write-off method is not to be used in those cases where bad debts are material; what is “wrong” with the method? One important accounting principle is the notion of matching. That is, costs related to the production of revenue are reported during the same time period as the related revenue (i.e., “matched”). With the direct write-off method, you can well understand that many accounting periods may come and go before an account is finally determined to be uncollectible and written off. As a result, revenues from credit sales are recognized in one period, but the costs of uncollectible accounts related to those sales are not recognized until another subsequent period (producing an unacceptable mismatch of revenues and expenses). Download free ebooks at bookboon.com 10 Accounting for Uncollectible Receivables Current Assets: Part II To compensate for this problem, accountants have developed “allowance methods” to accou To compensate for this uncollectible accounts. Importantly, an“allowance method mustaccount for problem, accountants have developed allowance methods” to be used except in those case uncollectible accounts. bad debts arean allowance (and for tax purposes where tax those often stipulate that a direct w Importantly, not material method must be used except in rules cases where bad debts are not material (and for taxbe used). Allowancerules often stipulate that a direct write-off estimated bad approach is to purposes where tax methods will result in the recording of an approach is to be used).expense in the same period as the related credit sales. As you will soon see, the actual write Allowance methods will result in the recording of an estimated bad debts expense in the same period as the related credit sales. Asnot impact incom...
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