direct write-off method

Examples of direct write-off method in the following topics:

• Valuing Notes Receivable

  • Companies have two methods available to them for measuring the net value of accounts receivable: the allowance method and the direct write-off method.
  • Companies have two methods available to them for measuring the net value of accounts receivable--the allowance method and the direct write-off method.
  • The first method is the allowance method, which establishes a contra-asset account, allowance for doubtful accounts, or bad debt provision, that has the effect of reducing the balance for accounts receivable.
  • The second method is the direct write off method.
  • Differentiate between the allowance method and the write off method for valuing notes receivable

• Valuing Accounts Receivable

  • Companies use two methods to account for bad debts: the direct write-off method and the allowance method.
  • For tax purposes, companies must use the direct write-off method, under which bad debts are recognized only after the company is certain the debt will not be paid.
  • Smith fails to pay a $100 balance, for example, the company records the write-off by debiting bad debts expense and crediting accounts receivable from J.
  • Under the allowance method, an adjustment is made at the end of each accounting period to estimate bad debts based on the business activity from that accounting period.
  • Differentiate between the direct write-off method and the allowance method of accounts receivable valuation

• Write-Offs

  • Companies use two methods for handling uncollectible accounts: the allowance method and the direct write-off method.
  • Companies use two methods for handling uncollectible accounts: the direct write-off method and the allowance method.
  • The direct write-off method is simpler than the allowance method in that it allows for one simple entry to reduce accounts receivable to its net realizable value.
  • The entry to write off this account is:
  • Explain how to write off an uncollectible account using both the direct write-off and the allowance method.

• Activities to Manage Receivables

  • When the customer pays off their accounts, one debits cash and credits the receivable in the journal entry.
  • The first method is the allowance method, which establishes a contra-asset account, allowance for doubtful accounts, or bad debt provision, that has the effect of reducing the balance for accounts receivable.
  • The second method is the direct write-off method.
  • It is simpler than the allowance method in that it allows for one simple entry to reduce accounts receivable to its net realizable value.

• Dealing with Foreign Currency and Bad Debts

  • To deal with foreign currency and bad debts, we have a "gain or loss" account and methods to measure the net value of accounts receivable.
  • To deal with bad debts, companies have two methods available to them for measuring the net value of accounts receivable, which is generally computed by subtracting the balance of an allowance account from the accounts receivable account.
  • The first method is the allowance method, which establishes a contra-asset account, allowance for doubtful accounts, or bad debt provision, that has the effect of reducing the balance for accounts receivable.
  • The second method is the direct write-off method.
  • It is simpler than the allowance method in that it allows for one simple entry to reduce accounts receivable to its net realizable value.

• Recognizing Notes Receivable

  • When the customer pays off their accounts, one debits cash and credits the receivable in the journal entry.
  • The first method is the allowance method, which establishes a contra-asset account, allowance for doubtful accounts, or bad debt provision, that has the effect of reducing the balance for accounts receivable.
  • This second method is simpler than the allowance method in that it allows for one simple entry to reduce accounts receivable to its net realizable value.
  • The two methods are not mutually exclusive, and some businesses will have a provision for doubtful debts, writing off specific debts that they know to be bad (for example, if the debtor has gone into liquidation. )
  • Describe the difference between using the allowance method vs. the write off method when recording a note receivable

• Recognizing Accounts Receivable

  • Assuming Furniture Palace uses the accrual method of accounting, a journal entry is recorded for the sale of the item and the extension of credit to the customer.
  • If so, you can either charge these losses to expense when they occur, known as the direct write-off method, or you can anticipate the amount of such losses and charge an estimated amount to expense, known as the allowance method .
  • When the customer pays off their accounts, one debits cash and credits the receivable in the journal entry.
  • Two methods are available to calculate the amount of bad debt expense and allowance of doubtful accounts at the end of an accounting period -- percentage of accounts receivable or percentage of sales.
  • An example of how to calculate the allowance for doubtful accounts using the percentage of receivables method -- Assume Furniture Palace has an ending accounts receivable balance of USD 10,000 and estimates that 5% of receivables are doubtful.

• Income Statement Formats

  • It displays the revenues recognized for a specific period, and the cost and expenses charged against these revenues, including write-offs and taxes.
  • Thus, the balance sheet has a direct relation with the income statement.
  • Some numbers depend on accounting methods used.

• Methods of Depreciation

  • There are various methods that can calculate depreciation expense for the period; the method used should reflect the asset's business use.
  • Some of the most common methods used to calculate depreciation are straight-line, units-of-production, sum-of-years digits, and double-declining balance, an accelerated depreciation method.
  • This method is typically applied to assets used in the production line.
  • Sum-of-years' digits is a depreciation method that results in a more accelerated write-off than straight line, but less accelerated than that of the double-declining balance method.
  • The depreciation method for an automobile should reflect the asset's use throughout its life.

• Impact of Depreciation Method

  • Sum-of-years digits is a depreciation method that results in a more accelerated write off of the asset than straight line but less than double-declining balance method.
  • This method will reduce revenues and assets more rapidly than the straight-line method but not as rapidly as the double-declining method.
  • Double-declining balance is a type of accelerated depreciation method.
  • To calculate depreciation using the double-declining method, its possible to double the amount of depreciation expense under the straight-line method.
  • Explain how the choice of depreciation method affects a company's revenue