What is the difference in the direct write-off method and the allowance method?

direct write-off method. tax purposes, companies must use direct write-off method, under bad debts recognized after company debt not paid. before determining account balance uncollectible, company makes several attempts collect debt customer. recognizing bad debt requires journal entry increases bad debts expense account , decreases accounts receivable.

internal revenue service permits companies take tax deduction bad debts after specific uncollectible accounts have been identified. unless company's uncollectible accounts represent insignificant percentage of sales, however, may not use direct write-off method financial reporting purposes. since several months may pass between time sale occurs , time company realizes customer's account uncollectible, matching principle, requires revenues , related expenses matched in same accounting period, violated if direct write-off method used. therefore, companies use direct write-off method on tax returns use allowance method on financial statements.

allowance method. under allowance method, adjustment made @ end of each accounting period estimate bad debts based on business activity accounting period. established companies rely on past experience estimate unrealized bad debts, new companies must rely on published industry averages until have sufficient experience make own estimates.

adjusting entry estimate expected value of bad debts not reduce accounts receivable directly. accounts receivable control account must have same balance combined balance of every individual account in accounts receivable subsidiary ledger. since specific customer accounts become uncollectible not yet known when adjusting entry made, contra-asset account named allowance bad debts, called allowance doubtful accounts, subtracted accounts receivable show net realizable value of accounts receivable on balance sheet.

pls click on link illustrations of journal entries , general ledger entries.

what difference in direct write-off method , allowance method?how recorded? how 2 methods affect financial statemet?

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