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ACC 610 Module 4 Discussion

This document discusses two techniques for recording bad debt expense: the direct-off technique and the allowance technique. The direct-off technique writes off bad debts directly to the receivables account, contrary to the matching concept. The allowance technique estimates future bad debts and records an estimated bad debt expense, debiting an allowance for doubtful accounts contra-asset account. Both techniques are necessary for reporting but for different reasons - the allowance technique adheres better to GAAP, while the direct-write off reflects actual uncollected amounts.

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74 views

ACC 610 Module 4 Discussion

This document discusses two techniques for recording bad debt expense: the direct-off technique and the allowance technique. The direct-off technique writes off bad debts directly to the receivables account, contrary to the matching concept. The allowance technique estimates future bad debts and records an estimated bad debt expense, debiting an allowance for doubtful accounts contra-asset account. Both techniques are necessary for reporting but for different reasons - the allowance technique adheres better to GAAP, while the direct-write off reflects actual uncollected amounts.

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vincent
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4-1 Discussion: Case C6-3 AICPA Adapted: Bad Debt Expense

“The direct-off technique incorporate writing off a bad debt expense directly against the

corresponding receivable account” (Wahlen et al., 2017). Even though this technique is based on

facts rather than approximates, it goes contrary to the matching accounting concept, and

generally, it needs to be acknowledged for financial reporting. Conversely, the allowance

technique is when a corporation tries to forecast future bad debts in its accounts receivable; the

company tries to predict a credit risk (Kimmel et al., 2009). This technique studies the

corporation’s historical data from bad debts it has occurred, the firm’s policy and credit risk

strategy, the historical fall and rise in the economy, and the industry-wide experiences (Wahlen

et al., 2017). The allowance technique contrasts the historical information with current accounts

receivables or sales to determine associations utilized in approximating existing uncollected

accounts.

When a corporation records the estimate of bad debts, the entries are as follows: Bad

Debt Expense is debited and Allowance for the doubtful account is credited. Bad debt expense is

listed on the profit and loss account as an operating expense. In contrast, “Allowance for

doubtful accounts is a valuation (contra) account offset by accounts receivable under the section

of current assets of the balance sheet” (Wahlen et al., 2017). Credit sales would generate a

higher chance of recording losses from bad debts since the corporation does not know the exact

time of sale in which the client accounts will be collected. Offsetting Allowance for doubtful

accounts with accounts receivables demonstrates the net realizable value of the firm's receivables

for any person seeking to use the company's financial statements (Kimmel et al., 2009).

Both techniques would be necessary for reporting but for diverse rationales. The

allowance technique makes the most sense since it adheres to the matching accounting concept
under GAAP (Kimmel et al., 2009). Conversely, the direct write-off technique would be

excellent in several scenarios since its values are based on facts instead of estimates.

References

Kimmel, P. D., Weygandt, J. J., & Kieso, D. E. (2009). Accounting: Tools for Business

Decision Making (3rd ed.). Hoboken, NJ: John Wiley & Sons, Inc.

Wahlen, J.M., Jones, J.P., & Pagach, D.P. (2017). Intermediate Accounting: Reporting and

Analysis (2nd ed.). Boston, MA: Cengage Learning.

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