Introduction
Accounts receivables are the number of debts owed to the enterprise by legal entities and individuals who are its debtors. Moreover, it is an asset of the enterprise, and it is of great importance to keep it under control. Otherwise, the company will inevitably face a constant and uncontrollable increase in debt. To avoid negative consequences for uncollectible accounts receivables, an effective allowance method can be used.
Main body
The allowance method consists of assessing and accounting of bad debts when the debtor is unable to pay a certain amount. This approach is a more productive alternative to the direct method. This type of debt is the amount that the customer owes after the sale on credit (Adusei, 2017). However, there are cases when some accounts receivable will remain unpaid. In this case, it will need to be entered into the accounting statements of the organization.
Applying the allowance method implies that the assessment of expenses on bad debts is reflected in the same reporting period in which sales on credit and accounts receivable are taken into account. This is the main difference between it and the direct method. This is due to the fact that the second approach takes into account the costs of bad debts only if the amount is determined as irrevocable. Moreover, the period may differ from when the initial sale was registered.
Conclusion
In conclusion, it is worth noting that despite such a successful method of struggle as the allowance method, it is always necessary to monitor the situation. Of particular importance is constant contact with debtors and a reminder of possible sanctions. As a solution, methods of peaceful resolution of cases of unpaid debts can also be used. The entrepreneur must constantly monitor the number of accounts receivable personally.
References
Adusei, C. (2017). Accounts receivables management: Insight and challenges.International Journal of Finance & Banking Studies, 6(1), 101-112. Web.