Page 64 - Demo

Ch(3) : Accounting for Receivable61losses are insignificant, the direct write off method is not acceptable for financial reporting purposes. 1-ALLOWNCE METHOD FOR UNCOLLECTIBLE ACCOUNTSThe allowance method of accounting for bad debts involves estimating uncollectible accounts at the end of each period. This provides better matching on the income statement. It also ensures that companies state receivables on the balance sheet at their cash (net) realizable value. Cash (net) realizable valueis the net amount the company expects to receive in cash, when collecting the receiving. It excludes amounts that the company estimates it will not collect.This method reduces receivable in the balancesheet by the amount estimated uncollectible receivables GAAP(Generally Accepted Accounting Principles)requires the allowance method for financial reporting purposes when bad debts are material in amount. This method has essential features:1-Companies estimateuncollectible account receivable. They match this estimated expense against revenuesin the same accounting period in which they record the revenues.2-Companies debit estimated uncollectible to bad debt expense and credit them to allowance for doubtful accounts an adjusting entry at the end of each period. Allowance for doubtful accounts is a contra account to account receivable. 3-When companies write off a specific account, they actuallydebtto allowance for doubtful accounts and credit that amount to account receivable.