Under the allowance method, bad debts expense is recorded with an adjustment at the end of each accounting period that debits the Bad Debts Expense account and credits the Allowance for Doubtful Accounts. The uncollectible accounts are later written off with a debit to the Allowance for Doubtful Accounts.

1 The allowance method of accounting for bad debts has the following advantages over the direct write-off method including: [You may select more than one answer. Single click the box with the question mark to produce a check mark for a correct answer and double click the box with the question mark to empty the box for a wrong answer. Any boxes left with a question mark will be automatically graded as incorrect.)

2 Records estimated bad debts expense in the period when the related sales are recorded. 2 Records estimated bad debts expense when the account receivable is determined to be uncollectible 2 Reports accounts receivable on the balance sheet at the estimated amount of cash to be collected. 2 Reports sales on the income statement at the estimated amount of cash to be collected.

*Records estimated bad debts expense in the period when the related sales are recorded.

*Reports accounts receivable on the balance sheet at the estimated amount of cash to be collected.

Explanation:

The allowance and write off methods represent 2 different methods by which businesses recognize Customer Indebtedness that is perceived doubtful and irrecoverable.

A business can choose to apply any of the methods that best suits its line of business and the type of channel or customers it serves.

Each method has its advantages and some disadvantages.

The direct write off method is simple to apply. The business managers only have to wait for a debt to go bad and a debit is passed against the Income statement. The risk however is if the sum is substantial it may lead to business having to refinance itself or wind down operations.

When readers of Financial statements study the records of a company, one aspect that catches their attention is the ageing of debts and the allowances made for irrecoverable debts. The direct write off method will make it difficult for the users to have faith in the Assets of the Business as anything may go wrong to deplete shareholders value.

This weakness is what the allowance method tries to manage. By applying a certain industry rate of historical rate to make allowances annually even when the debts haven't gone bad.

This helps investors in identifying the risk management with respect to debt collections. However the risk also remains of either over stating the allowance or understating it.

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