Which of the two methods of estimating uncollectibles provides for the most accurate estimate of the current net realizable value of the receivables?

Which of the two methods of estimating uncollectibles provides for the most accurate estimate of the current net realizable value of the receivables?  

Answer

The allowance method is an estimate, whereas the direct write-off method is used only when the receivable is deemed to be uncollectible.

 

Uncollectible accounts are a problem for businesses that operate on an accrual basis. The allowance method estimates a percentage of accounts that will be uncollectible each year. The following J/E has been prepared.

 

Bad debt expense XXXX

allowance for doubtful accounts XXXX

 

The allowance for doubtful accounts is a contra account to accounts receivable, thus reducing A/R. If at year-end more accounts were collected than expected, a journal entry would be prepared to reflect this:

Allowance for doubtful accounts XXXX

Bad debt expense XXXX

 

The allowance method would provide for a more accurate estimate of the current net realizable value of receivables because the direct write-off method only accounts for those accounts that are deemed to be uncollectible and does not account for those that will become uncollectible.

 

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