The two methods of accounting for uncollectible accounts receivable are ___
The allowance method and the direct-write off method
The two methods of accounting for uncollectible accounts receivable are:
1. Direct write-off method – This method is relatively simple and is used by small businesses or businesses with a lesser number of accounts receivable. Under this method, accounts receivable that are deemed uncollectible are written off directly as expenses it becomes uncollectible. This method does not allow for an estimation of the extent of bad debts at the end of each accounting period but writes off the account as soon as it is deemed uncollectible.
2. The allowance method – This is the preferred method under generally accepted accounting principles (GAAP) and is used by most businesses. Under this method, a business estimates the total amount of bad debts at the end of each accounting period and records it as an estimated expense by creating an allowance for doubtful accounts. The allowance is created using historical data, analysis of current market trends and customer creditworthiness. When an account is deemed uncollectible, it is written off against this allowance for doubtful accounts, leaving the balance in the allowance account.
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