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The 2 steps required for using the allowance method are to
- The first step make an end-of-period adjustment to record the estimated bad debts and the
- The second step is to write off specific customer balances when they are known to be uncollectable.
Companies normally use one of the two techniques to account for unrecoverable debt: the allowance method and the direct write-off method. The allowance approach anticipates and prepares for a positive quantity of unpaid debt while the direct write-off method deals with the debt only after it hasn't been paid.
The allowance method includes placing apart a reserve for horrific money owed which might be expected in the future. The reserve is primarily based on a percentage of the income generated in a reporting duration, probably adjusted for the risk associated with certain clients.
When it is determined that an account can not be gathered, the receivable balance must be written off. when the unit keeps an allowance for doubtful debts, the write-off reduces the outstanding accounts receivable and is charged in opposition to the allowance – do not record bad debt expenses again.
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