P8-5A Malone Company
In this tutorial, we will look at a few examples of adjusting entries for Bad Debt Expenses. This should show you the pros and cons when comparing the Direct Write-Off Method to the Allowance for Doubtful Accounts method.
- Student: Tyler Muffty
- Textbook: Principles of Accounting II
- Course: Accounting Week 3
Video Tutorial by OctoTutor
At December 31, 2017, the trial balance of Malone Company contained the following amounts before adjustment.
- Accounts Receivable: $180,000
- Allowance for Doubtful Accounts: $ 1,500
- Sales Revenue: 875,000
Prepare the adjusting entry at December 31, 2017, to record bad debt expense, assuming that the aging schedule indicates that $10,200 of accounts receivable will be uncollectible.
|Bad Debt Expense||8,700|
|Allowance for Doubtful Accounts||8,700|
(b) Repeat part (a), assuming that instead of a credit balance there is a $1,500 debit balance in Allowance for Doubtful Accounts.
|Debit on Doubtful Accounts||1,500|
|Bad Debt Expense||11,700|
|Allowance for Doubtful Accounts||11,700|
(c) During the next month, January 2018, a $2,100 account receivable is written off as uncollectible. Prepare the journal entry to record the write‐off.
|Write off amount||2,100|
|Allowance for Doubtful Accounts||2,100|
(d) Repeat part (c), assuming that Malone Company uses the direct write‐off method instead of the allowance method in accounting for uncollectible accounts receivable.
|Bad Debt Expense||2,100|
What are the advantages of using the allowance method in accounting for uncollectible accounts as compared to the direct write‐off method?
With the allowance method, an future bad debt is placed into a reserve account as soon the transaction occurs. This makes bad debts more proactive because it requires management to make estimates in advance. It is considered a more conservative approach compared to the direct write off method. The direct write off could lead to unexpected liquidity problems if the expense is large enough. The main drawback is that it is more complicated record and manage from the company’s standpoint.