When Is the Allowance Method of Accounting for Collectible Accounts Required?

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The allowance method of accounting for collectible accounts is going to be required under a few very specific types of situations. Find out about when the allowance method of accounting for collectible accounts is required with help from an accounting professional in this free video clip.

Part of the Video Series: Accounting & Finance
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Hi, I'm Lori Greer, and I'm here to explain when is the allowance method of accounting for collectible accounts required. The allowance method is required when it's known that a customer will actually not pay the balance on the account due to for example a bankruptcy. The allowance method results in a good matching of bad debt expense against sales. The journal entry at your end to record anticipated uncollectibility of accounts receivable is to debit bad debt and credit allowance for bad debt. When it is known that a customer will actually not pay the balance because of the bankruptcy for example, the entry is to debit allowance for bad debt and credit accounts receivable. If for whatever reason the customer does pay at a later date, there is a recovery. You would reverse the last entry and make a second entry debiting cash and crediting accounts receivable. However, it should be noted that firms other than the small financial institutions are required to use the direct right off method for tax purposes. Again, I'm Lorie Greer from Atlanta, Georgia, and that's when the allowance method of accounting for collectible accounts is required.

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