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College Accounting, Chapters 1-27

23rd Edition
HEINTZ + 1 other
ISBN: 9781337794756

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Chapter
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BuyFindarrow_forward

College Accounting, Chapters 1-27

23rd Edition
HEINTZ + 1 other
ISBN: 9781337794756
Textbook Problem

There are two methods of accounting for uncollectible accounts: the allowance method and the direct write-off method.

To determine

Identify whether the given statement is true or false.

Answer

True

Explanation

There are two methods of accounting for uncollectible accounts, which are allowance method and direct-write off method.

Allowance method: It is a method for accounting for uncollectible accounts, where uncollectible accounts receivables are estimated, and recorded at the end of particular period. Under this method, bad debts expenses are estimated, and recorded prior to the occurrence of actual bad debt, in compliance with matching principle, by using the allowance for doubtful account.

  • Under this method, uncollectible amount of receivables are estimated and matched against revenues of the same accounting period in accordance with matching principle.
  • The determined amount of uncollectible receivable are debited as bad debt expense and credited as allowance for uncollectible accounts at the end of the accounting period by making an adjusting entry.
  • A specific receivables account would be written off as actual uncollectible by debiting allowance for doubtful accounts and by crediting accounts receivable, when a business or organization realize that specific account would be uncollectible forever.

Direct write-off method: Under this method, accounts would be written off only when it is ascertained that the receivables from a customer remain uncollectible.

Under direct write-off method, a business does not make an estimation and allowance for uncollectible accounts, instead this method directly writes-off the uncollectible accounts and records the bad debt expense by debiting bad debt expense and by crediting accounts receivable, when a specific customer account is determined to be uncollectible forever.

Hence, the given statement is true.

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