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Allowance for Uncollectible Accounts
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Bad debts is the direct write-off method of uncollectable for accounts receivable.
No
When there is credit risk in accounts receivable, the amount that is expected to be uncollectible needs to be subtracted from accounts receivable (resulting in net accounts receivable). In case there is no such allowance created, accounts receivable is overstated. As a result, equity is overstated as well (since there are no expenses booked to create the allowance). Thus, not including the allowance leads to overstated assets and overstated equity.
Allowance for Uncollectible Accounts
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net Accounts Receivable will be overstated.
Bad debts is the direct write-off method of uncollectable for accounts receivable.
No
When there is credit risk in accounts receivable, the amount that is expected to be uncollectible needs to be subtracted from accounts receivable (resulting in net accounts receivable). In case there is no such allowance created, accounts receivable is overstated. As a result, equity is overstated as well (since there are no expenses booked to create the allowance). Thus, not including the allowance leads to overstated assets and overstated equity.
Uncollectible accounts refer to accounts receivable (money owed to a company by its customers) that are unlikely to be collected. These are typically debts that have become delinquent and the company has determined that collecting the payment is not feasible. The company may choose to write off these accounts as bad debt and remove them from its books.
Setting up an allowance for uncollectible accounts is an application of the Principle of Conservatism. The idea is that when there are uncertain outcomes, you don't want to make the company look "too good," because that might mislead financial statement users.
No while using allowance method, bad debts are charged to allowance for bad debts account rather charging the accounts receivable because accounts receivable was already charged with allowance when it was created.
The percentage-of-receivables method is a way for a company to estimate its Allowance for Uncollectible Accounts and Bad Debt Expense. It is considered a "Balance Sheet Approach," because total Allowance for Uncollectible Accounts is estimated as a percent of total Accounts Receivable. Bad Debt expense then becomes the increase between the previous year's Allowance and the current year's Allowance.
The percentage-of-receivables method is a way for a company to estimate its Allowance for Uncollectible Accounts and Bad Debt Expense. It is considered a "Balance Sheet Approach," because total Allowance for Uncollectible Accounts is estimated as a percent of total Accounts Receivable. Bad Debt expense then becomes the increase between the previous year's Allowance and the current year's Allowance.
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