Allowance Method

Examples of Allowance 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.
  • 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

• Recognizing Notes Receivable

  • 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.
  • 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

• 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.
  • Note that the allowance method is the required method for federal income tax purposes (GAAP).
  • It debits the Allowance for Doubtful Accounts.
  • Allowance for uncollectible accounts 3,000 Cr. // 750 Dr. // 2,250 Cr.

• 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.

• Trade Allowances

  • Other trade sales promotion methods include trade contests, which are contests that reward retailers that sell the most products, and point-of-purchase displays, which are used to create the urge of "impulse" buying.

• 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 .
  • 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.
  • To adjust the allowance account for the new estimate, debit Bad Debt Expense for USD 500 (10,000 *0.05) and credit Allowance for Doubtful Accounts for USD 500.
  • To adjust the allowance account for the new period's estimate, debit Bad Debt Expense for USD 2,000 (20,000 *0.10) and credit Allowance for Doubtful Accounts for USD 2,000.

• Calculating GDP

  • Both of these methods calculate GDP by evaluating the final stage of sales (expenditure) or income (income).
  • GDP = National Income (NY) + Indirect Business Taxes (IBT) + Capital Consumption Allowance and Depreciation (CCA) + Net Factor Payments to the rest of the world (NFP)
  • The output approach is also called "net product" or "value added" method.
  • This method consists of three stages:
  • The metric is one method of understanding economic growth within a country's borders.

• Recording Purchases

  • Purchases are offset by Purchase Discounts, and also Purchase Returns and Allowances.
  • Under the gross method, the total cost of purchases are credited to accounts payable first, and discounts realized later if the payments were made in time.
  • Under the net method, purchase discounts are realized right away.

• Other Approaches to Calculating GDP

  • This method measures GDP by adding incomes that firms pay households for factors of production they hire- wages for labor, interest for capital, rent for land, and profits for entrepreneurship.
  • Depreciation (or Capital Consumption Allowance) is added to get from net domestic product to gross domestic product.