Question

The two methods of accounting for uncollectible accounts receivable are ________.

Answer 1

The two methods of accounting for uncollectible accounts receivable are the allowance method and the direct write-off method.

What is the direct write-off method?

• When a small business decides an invoice is uncollectible, they can instantly debit the Bad Debts Expense account and credit Accounts Receivable under the direct write off technique.
• This cancels out the income that was reported as well as the remaining balance that was owed to the company in the books. The generally accepted accounting principles (GAAP) are broken by the direct write-off method approach.
• According to GAAP, all expenses related to reported revenue must be incurred during the same accounting period. The matching principle is what Accounting Tools refers to as.
• But when a company decides an invoice won't be paid, the write-off method enables revenue to be expensed. This gives the impression that a company is more profitable than it actually is, at least in the short term.

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