You Decide: Which method is better-the direct write-off method or the allowance method?
Response to the following problem:
Your father-in-law has asked you to help him with some basic accounting duties dealing with a local irrigation company of which he is president. The company has issued shares of stock allowing shareholders the right to use a specified amount of water every week from a water canal that passes through town. Your main duties would consist of billing and collecting yearly dues from the shareholders and maintaining the books with a canned software system. There are less than 60 shareholders in the company.
Should you write off receivables from customers when it is determined they will not pay, or should you estimate the percentage of receivables that will be uncollectible and establish an allowance?
Your father-in-law does not want an allowance because he believes all customers will pay. What should you do?