Timmons Company had a January 1, balance in its Allowance for Doubtful Accounts

Question

Timmons Company had a January 1, balance in its Allowance for Doubtful Accounts of $7,000 for the current year. The following transactions and events affected the Allowance for Doubtful Accounts during the current year: Apr 15 Bard's account receivable of $5700 was deemed uncollectable. July 1 Drake paid the full amount of a previously written-off account receivable. This receivable of $2300 had been written off in the prior year. Dec 31. Bad debts expense of $7500 was recorded. a. What amount should appear in the allowance for doubtful accounts in the December 31, balance sheet for the current year? b. How are the direct write-off method and the allowance method applied in accounting for uncollectible accounts receivables? Please explain in words.

Explanation / Answer

a)

$7500 should appear in the allowance for doubtful accounts in the December 31, balance sheet for the current year

b)In direct write off methods, the bad debt expenses are recorded as and when the some of the accounts receivable becomes uncollectible. In this method no provision is created for bad debt (as is done in allowance for bad debt method) and the accounts receivables are shown at their gross value in the balance sheet. Usually there is a significant time period in between the sales (on account) and the collection of sales from the customers. Thus in case of direct write off method, the bad debt expense, when recorded, does not match with the revenue (sales on account) for which the expense has been incurred. This creates a problem to maintain the matching principle in accounting. The journal entry that is used to record the bad debt expense in direct write off method is passed by Debiting Bad Debt expense and Crediting Accounts Receivable .

In case of allowance method an Allowance account is created for the bad debt based on the anticipation and the credit quality of the debtors. The allowance is created by Debiting the bad debt account and Crediting the allowance for doubtful debt Account during the accounting period in which the credit sales have taken place. This method therefore is better to conform to the Matching Principle. When some of the accounts receivable becomes uncollectible, a journal is passed by adjusting the accounts receivable with the allowance for doubtful accounts as follows:

Debit : Allowance for doubtful Accounts

Credit: Accounts receivable

Date Account Title & Explanation Debit ($) Credit ($) Apr-15 Bad Debt Expense 5700 Allowance for Doubtful Accounts 5700 (uncollectible accounts recorded) Jul-01 Accounts Receivable 2300 Allowance for Doubtful Accounts 2300 (Reinstatement of accounts for recovery of bad debt already recorded) Cash 2300 Accounts receivable 2300 (Cash received for bad debt recovered) Dec-31 Allowance for Doubtful Accounts 7500 Accounts Receivable 7500 (bad debt expense recorded)

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