Compare and contrast the direct write off method versus the allowance method for account for bad debts.

The two different methods that can be used to account for bad debts are the direct write of method and the allowance method.
-Direct write-off method. This method records bad debt expense when it becomes apparent that the customer is not going to pay the amount due. If the direct write-off method is used,the customer's uncollectible account receivable is removed and bad debt expense is recorded at the time a specific customer's account becomes uncollectible. The direct write-off method is used for tax purposes.
-Allowance method. The allowance method estimates bad debt expense and establishes an allowance or reserve for uncollectible accounts. When using the allowance method,uncollectible accounts expense is estimated in advance of the write-off. The estimate can be calculated as a percentage of sales or as a percentage of accounts receivable. (For example,2% of credit sales might be estimated to be uncollectible.)This method should be used if uncollectible accounts have a material effect on the company's financial statements used by investors and creditors.