Comparing Direct Write-Off and Allowance Methods

Journal entries for the direct write-off and allowance methods are illustrated and compared in this section. As a basis for illustration, the following transactions, taken from the records of Hobbs Co. for the year ending December 31, 2013, are used:

Mar. 1. Wrote off account of C. York, $3,650.

Apr. 12. Received $2,250 as partial payment on the $5,500 account of Cary Bradshaw. Wrote off the remaining balance as uncollectible.

June 22. Received the $3,650 from C. York, which had been written off on March 1. Reinstated the account and recorded the cash receipt.

Sept. 7. Wrote off the following accounts as uncollectible (record as one journal entry):

Dec. 31. Hobbs Company uses the percent of credit sales method of estimating uncollectible expenses. Based on past history and industry averages, 1.25% of credit sales are expected to be uncollect­ible. Hobbs recorded $3,400,000 of credit sales during 2013.

Exhibit 3 illustrates the journal entries for Hobbs Company using the direct write­off and allowance methods. Using the direct write-off method, there is no adjusting entry on December 31 for uncollectible accounts. In contrast, the allowance method records an adjusting entry for estimated uncollectible accounts of $42,500.

Comparing Direct Write-Off and Allowance Methods

The primary differences between the direct write-off and allowance methods are summarized below.

Source: Warren Carl S., Reeve James M., Duchac Jonathan (2013), Corporate Financial Accounting, South-Western College Pub; 12th edition.

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