ACCT1501 Lecture Notes - Lecture 8: Debits And Credits, Dd National, Balance Sheet
Document Summary
Allowance for doubtful debts: direct write off method. This method does not use contra accounts, bad debt is taken from accounts receivable. This method is used for when the chances for collecting cash from all accounts is high or there are few credit sales. Uses the contra account allowance of doubtful debts. Estimates accounts receivables that are unlikely to be received. On the balance sheet accounts receivable is valued at net amount (i. e. doubtful debts have been deducted) Allowance of dd is an estimation, the debts are not bad until the business writes them off. If a business decides it will not be payed and they write it off: Ways to estimate dd: income statement approach. Based on % sales, e. g. company may say 2% is the average not repaid, and (credit sales)x0. 02 = bad expenses for year: balance sheet approach. Revolves around the approach that the older a debt is, the less likely it is to be collected.
