Written Communication AP5-7 You have been hired as a consultant by a parts manuf
ID: 2542845 • Letter: W
Question
Written Communication AP5-7 You have been hired as a consultant by a parts manufacturing firm to provide advice as to the proper accounting methods the company should use in some key areas. In the area of receivables, the company president does not understand your recommendation to use the allowance method for uncollectible accounts. She stated, "Financial statements should be based on objective data rather than the guesswork required for the allowance method. Besides, since my uncollectibles are fairly constant from period to period, with significant variations occurring infrequently, the direct write-off method is just as good as the allowance method." Required: Draft a one-page response in the form of a memo to the president in support of your recommendation for the company to use the allowance method.Explanation / Answer
13th March 2018
To
The President
ABC Parts Manufacturing Company
Dear Sir,
This is with reference to the accounting method that should be used in your organization in the area of receivables. I would recommend that your organization should use the allowance method for uncollectible accounts. The allowance for uncollectible accounts is a contra account and the value of this contra account is deducted from the amount that is standing in the accounts receivable account as on the balance sheet.
The allowance method for uncollectible accounts does not involve any guesswork. On the contrary the uncollectible accounts are determined on a scientific basis using the historical financial data of the company. The historical data will be used to determine the percentage of accounts receivable that will be allocated to uncollectible account.
The allowance method is superior to the direct charge-off method. This is because the direct charge-off method violates the matching principle. The allowance method, on the other hand, adheres to the matching principle. Secondly the direct charge-off method does not conform to the GAAP (generally accepted accounting principles) standards and procedures. The allowance method, on the other hand, adheres to the procedural standards of GAAP.
On the basis of the above mentioned points I would recommend that your parts manufacturing company should start using the allowance method for uncollectible accounts.
Regards.
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