For achieving the maximum sales, goods are often sold to known customers on credit. Since of these customers fails to pay their debts due to insolvency or any other factor, in other words, debts which cannot be recovered are called Bad Debts. It is a loss/expense to the business so, an adjustment is needed. Determining the amount of accounts receivable to report is difficult because some receivables will become uncollectible. It should be noted here that no Adjusting Entry is required for any bad debt which is appearing already in the Trial Balance. The bad debt appearing in the trial balance shows as expense in the income statement only. Two methods are used in accounting for uncollectible accounts are:
- Direct Write off Method and
- Allowance Method
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