Purpose: This exercise will identify the two approaches of applying the allowance method of accounting for uncollectible accounts receivable.
Howell's Department Store offers a store credit card for the convenience of its customers. Even though the store follows up on delinquent accounts, past experience indicates that a predictable amount of credit sales will ultimately result in uncollectible accounts. Because bad debts are a material amount, Howell uses the allowance method of accounting for uncollectible accounts.
Instructions
(a) Describe the two methods available for determining the amount of the adjusting entry to record bad debt expense and to adjust the allowance account. Also discuss the emphasis of each method.
(b) Explain why the direct write-off method is not a generally accepted accounting method for Howell's Department Store.