Under generally accepted accounting principles ( GAAP), the direct write-off method is not an acceptable method of recording bad debts, because it violates the matching principle. Once this account is identified as uncollectible, the company will record a reduction to the customer’s accounts receivable and an increase to bad debt expense for the exact amount uncollectible. The direct write-off method delays recognition of bad debt until the specific customer accounts receivable is identified. By: maggiebug 21 Source: wikimedia commons CC BY-NC-SA There are two methods a company may use to recognize bad debt: the direct write-off method and the allowance method.įigure 3.22 Bad Debt Expenses Uncollectible customer accounts produce bad debt. When future collection of receivables cannot be reasonably assumed, recognizing this potential nonpayment is required. Bad debt negatively affects accounts receivable (see Figure 3.22). Fundamentals of Bad Debt Expenses and Allowances for Doubtful Accountsīad debts are uncollectible amounts from customer accounts. What happens when a loan that was supposed to be paid is not paid? How does this affect the financial statements for the bank? The bank may need to consider ways to recognize this bad debt.
#Bad debts expense plus
The understanding is that the couple will make payments each month toward the principal borrowed, plus interest. A bank lends money to a couple purchasing a home (mortgage). You continue to request the money each month, but the friend has yet to repay the debt. At the end of two months, your friend has not repaid the money.
You lend a friend $500 with the agreement that you will be repaid in two months. 3.3 Bad Debt Expense and the Allowance for Doubtful Accounts
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