Direct Write-off Method: Under this method, actual losses from uncollectible accounts are charged to Bad-Debt expense. This method contravenes the matching rule because Bad Debts are often recorded in the periods subsequent to sale. Therefore, this method can impact the Income Statement and Balance Sheet of an organization and is thereby, suggested to be used only when the Bad Debt losses are insignificant. Allowance Method: This Method creates an allowance for doubtful debts at the end of each period by means of an adjustment entry. It is further categorized into two methods: 1. Percentage of Sales Method. 2. Aging of Receivables method. Allowance method complies with the matching rule as expense relating to a particular period is charged against revenues of that particular period. Also, under this method, receivables are recorded at their Net Realizable Value at the end of each period. Therefore, this method should be used for Financial Reporting purposes when the Bad Debt losses are material. To Indicate: The journal entries as per Direct Write-off Method and Allowance Method in the books of Lima Company
Direct Write-off Method: Under this method, actual losses from uncollectible accounts are charged to Bad-Debt expense. This method contravenes the matching rule because Bad Debts are often recorded in the periods subsequent to sale. Therefore, this method can impact the Income Statement and Balance Sheet of an organization and is thereby, suggested to be used only when the Bad Debt losses are insignificant. Allowance Method: This Method creates an allowance for doubtful debts at the end of each period by means of an adjustment entry. It is further categorized into two methods: 1. Percentage of Sales Method. 2. Aging of Receivables method. Allowance method complies with the matching rule as expense relating to a particular period is charged against revenues of that particular period. Also, under this method, receivables are recorded at their Net Realizable Value at the end of each period. Therefore, this method should be used for Financial Reporting purposes when the Bad Debt losses are material. To Indicate: The journal entries as per Direct Write-off Method and Allowance Method in the books of Lima Company
Definition Definition Entries made at the end of every accounting period to precisely replicate the expenses and revenue of the current period. This is also known as end of period adjustment. It can also refer to financial reporting that corrects errors made previously in the accounting period. Every adjustment entry affects at least one real account and one nominal account.
Chapter 9, Problem E9.21E
To determine
Direct Write-off Method: Under this method, actual losses from uncollectible accounts are charged to Bad-Debt expense. This method contravenes the matching rule because Bad Debts are often recorded in the periods subsequent to sale. Therefore, this method can impact the Income Statement and Balance Sheet of an organization and is thereby, suggested to be used only when the Bad Debt losses are insignificant.
Allowance Method: This Method creates an allowance for doubtful debts at the end of each period by means of an adjustment entry. It is further categorized into two methods:
1. Percentage of Sales Method.
2. Aging of Receivables method.
Allowance method complies with the matching rule as expense relating to a particular period is charged against revenues of that particular period. Also, under this method, receivables are recorded at their Net Realizable Value at the end of each period. Therefore, this method should be used for Financial Reporting purposes when the Bad Debt losses are material.
To Indicate:
The journal entries as per Direct Write-off Method and Allowance Method in the books of Lima Company