What are some limitations of using the direct write-off method?
It is against the matching principle.
Over-estimation of the receivables.
The accounts receivables report the sales amount for which payment is still due from the customer. It is considered a current asset of the business as the entity expects to receive it within one year.
The direct-write-off method does not comply with the matching principle and is also not accepted under GAAP. The matching principle states that expenses must be recorded when revenue is earned, but under the direct write-off, method expenses are recorded in the future months.
Under the direct write-off method, receivables are overstated on the balance sheet because the estimated bad debts are not adjusted against the accounts receivables.
Weddings on Demand sells on account and manages its own receivables. My average
experience for the past three years has been as follows:
Sales $ 350,000
Cost of Goods Sold 210,000
Bad Debts Expense 4,000
Other Expenses 61,000
Unhappy with the amount of bad debts expense she has been experiencing, Aledia
Sanchez, controller, is considering a major change in the business. Her plan would be
to stop selling on account altogether but accept either cash, credit cards, or debit cards
from her customers. Her market research indicates that if she does so, her sales will
increase by 10% (i.e., from $350,000 to $385,000), of which $200,000 will be credit
or debit card sales and the rest will be cash sales. With a 10% increase in sales, there
will also be a 10% increase in Cost of Goods Sold. If she adopts this plan, she will
no longer have bad debts expense, but she will have to pay a fee on debit/credit card
transactions of 2% of applicable sales. She also believes this plan will allow her to save
$5,000 per year in other operating expenses.
Should Sanchez start accepting credit cards and debit cards? Show the
computations of net income under her present arrangement and under the plan.
Applying the allowance method (aging-of-receivables) to account for Uncollectibles Surf and Sun had the following balances at December 31, 2018, before the year-end adjustments:
Allowance for Bad Debts
Bal. $ 2,063
The aging of accounts receivable yields the following data:
Age of Accounts Receivable
Over 60 Days
Estimated percent uncollectible
1. Journalize Surf and Sun’s entry to record bad debts expense for 2018 using the aging-of-receivables method.
2. Prepare a T-account to compute the ending balance of Allowance for Bad Debts.
Ensuring internal control over the collection of receivables Consider internal control over receivables collections. What job must be withheld from a company’s credit department in order to safeguard its cash? If the credit department does perform this job, what can a credit department employee do to hurt the company?
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