Accounting 2303 Week 8
Chapter 5 Part 1- Direct Write-Offs and the Allowance Method for Doubtful Accounts
Hello everyone! This week the resource will be walking through ways to account for uncollectable
accounts. Additionally, I will be providing Accounting group tutoring sessions from 6:30-7:30pm on
Tuesdays over Microsoft Teams each week. If you would like to attend those sessions or want to schedule
a 1-on-1 appointment with one of our fantastic accounting tutors, please visit www.baylor.edu/tutoring to
make an appointment!
-Jerry
What happens when we cannot collect our accounts receivable?
The accounts receivable account represents a promise made by an external company to pay for goods or
services at a later date. Sometimes companies will not be able to pay these debts that they owe. As such,
will need to adjust our records to reflect the delinquency of these accounts. To do this, we use either the
Direct Write-Off method or the Allowance method.
What is the Direct Write-Off Method?
The direct write-off method waits until an account is determined to be uncollectable before it “write’s off”
the account. To “write off” an account under this method we use the following journal entry:
DR: Bad Debt Expense (for the amount uncollectible).
CR: Accounts Receivable (for the amount uncollectible).
This journal entry gets rid of the expectation that we will receive these funds and records this amount as
an expense.
What are the shortcomings of the Direct Write-Off Method?
This method violates the expense matching principle by not recognizing an expense in the same period
that revenue is earned. In doing so, this method violates GAAP and overstates assets and net income. This
method will only be used in tax reporting.
What is the Allowance Method?
The allowance method is a two step process that estimates bad debt expense at the end of the current
accounting period and uses adjusting entries to write off customer accounts that become uncollectable. To
do this, we use the following journal entries:
Estimate Journal Entry:
DR: Bad Debt Expense
CR: Allowance for Doubtful Accounts
Write-Off Entry:
DR: Allowance for Doubtful Accounts
CR: Accounts Receivable
