Part 1: The Board Of Directors Has Asked You To Explain The ✓ Solved

Part 1the Board Of Directors Has Asked You To Explain the Method Used

Part 1: The Board of Directors has asked you to explain the method used to handle uncollectible Accounts Receivables. They know that you use the Allowance Method but are not familiar with the difference between the Direct Method versus the Allowance Method. Using the textbook as a source, explain each type of method and why ABC Company has selected the Allowance Method. Download the memo template provided below to respond. Keep in mind the intended audience of the memo.

Requirements: Writing, using software, and interpreting results is a large part of your learning experience. These assignments are designed to improve your use of technology and communication skills. Using proper business English and resources from the library you will comment and share your research with your classmates. Make sure you note your source in proper APA format. Link to Keiser's elibrary resources: PowerPoint instruction on how to use the Keiser elibrary: Keiser Slide show Library-Orientation-login-and-navigate-lesson1.pptx Guidance on how to log in and use the Keiser elibrary: KU Library login guide2014October3.pdf How to cite work from the library How to cite work from the library.docx This link helps with APA format:

Sample Paper For Above instruction

The method used to handle uncollectible accounts receivable is a critical aspect of a company's financial management and accurately representing its financial position. The two primary methods for accounting for uncollectible accounts are the Direct Write-Off Method and the Allowance Method. ABC Company has chosen the Allowance Method due to its adherence to GAAP (Generally Accepted Accounting Principles) and its ability to match revenues with related expenses more accurately. This paper explains both methods and the reasons why the Allowance Method is preferred, especially for a company like ABC.

Understanding the Direct Write-Off Method

The Direct Write-Off Method involves recording uncollectible accounts receivable only when an account is deemed uncollectible. When a receivable is identified as uncollectible, the company directly charges the expense to uncollectible accounts and removes the receivable from accounts receivable. This method is simple and easy to implement but has significant drawbacks. It does not adhere to the matching principle because the expense is recognized only when specific accounts are written off, which might be in a different period than the revenue was earned. Additionally, because bad debts are not estimated in advance, the accounts receivable may be overstated on the balance sheet, providing a less accurate picture of the company's financial position.

Understanding the Allowance Method

The Allowance Method involves estimating uncollectible accounts at the end of each accounting period and recording an adjusting journal entry to create an allowance for doubtful accounts. This estimation is typically based on historical data, industry averages, or specific account analysis. When an account is determined to be uncollectible, it is written off against this allowance. The Allowance Method aligns with the matching principle because it recognizes expected bad debts in the same period as the related revenue. This results in more accurate financial statements and a better reflection of the company's assets and profits.

Why ABC Company Selected the Allowance Method

ABC Company selected the Allowance Method because it provides a more accurate and consistent approach to managing uncollectible accounts. This method complies with GAAP, which requires companies to estimate and record bad debts in the same period as the revenue they relate to, thereby providing more reliable financial statements. Furthermore, the allowance method aids in better financial planning and analysis by smoothing out the impact of bad debts over multiple periods. It also enhances credibility with investors and creditors by presenting a realistic view of receivables and profitability.

Conclusion

In conclusion, while the Direct Write-Off Method may be simpler to apply, it falls short in providing an accurate financial picture, especially for larger companies like ABC that require adherence to accounting standards. The Allowance Method, through its estimated approach, offers a more systematic and GAAP-compliant way to account for uncollectible accounts receivable, ultimately supporting better financial management and reporting.

References

  • Gibson, C. H. (2018). Financial Reporting & Analysis (13th ed.). Cengage Learning.
  • Higgins, R. C. (2018). Analysis for Financial Management (11th ed.). McGraw-Hill Education.
  • Walther, B. (2019). Principles of Accounting. OpenStax. https://openstax.org/details/books/principles-accounting
  • Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2020). Intermediate Accounting (17th ed.). Wiley.
  • Keiser University Library. (n.d.). How to cite work from the library. Retrieved from https://library.keiser.edu
  • American Psychological Association. (2022). Publication manual of the American Psychological Association (7th ed.).
  • FASB. (2020). Accounting Standards Codification Topic 310, Receivables. Financial Accounting Standards Board.
  • ACCOUNTINGTOOLS. (2023). Allowance for Doubtful Accounts. Retrieved from https://www.accountingtools.com/articles/allowance-for-doubtful-accounts.html
  • Investopedia. (2022). Direct Write-Off Method. Retrieved from https://www.investopedia.com/terms/d/directwriteoffmethod.asp
  • Investopedia. (2022). Allowance Method. Retrieved from https://www.investopedia.com/terms/a/allowancemethod.asp

Related Assignments