What are the two methods of accounting for bad debts?
A) Receivable reduction and bad debt methods
B) Direct write-off and allowance methods
C) Allowance and bad debt methods
D) Direct write-off and receivable reduction methods

Question

Quizplus · Accepted Answer

The two methods of accounting for bad debts are the direct write-off method and the allowance method. The direct write-off method involves writing off a bad debt only when it becomes uncollectible. This method is not preferred because it does not accurately reflect the company's accounts receivable balance. The allowance method, on the other hand, involves estimating the amount of bad debts that may occur and creating an allowance account to offset the accounts receivable balance. This method is preferred because it provides a more accurate picture of the company's financial position. Therefore, the best choice is B.

What Are the Two Methods of Accounting for Bad Debts