Newman Shoes and Bowman Footwear both decided to write off a specific customer’s uncollectible account as a bad debt expense. If Newman Shoes uses the direct write-off method and Bowman Footwear uses the allowance method for uncollectible accounts, what will be the difference in the journal entries for these two companies?

For Newman Shoes, it will be recorded in Bad Debt Expense, while for Bowman Footwear, it will be recorded in Allowance for Doubtful Accounts.

Explanation: The Direct write-off method definition is a method used for recognizing bad debts expense that arises from selling commodities on credit.

An account receivable will be written-off directly to bad debts expense only after the account receivable has determined to be a bad debt or uncollectible. This method is very important, and it is used especially for income tax purposes.

The Allowance method refers to a method used in documenting uncollectible accounts receivable. The method records an estimate of bad debt expense in the same accounting period as the sale.

The allowance method is used in the adjustment of accounts receivable that appear on the balance sheet.

The allowance method is however, preferred over the direct write-off method due to the fact that, the income statement will report the bad debts expense closer to the time of the sale or service, and also, the balance sheet will report a more realistic net amount of accounts receivable that will actually be turning to cash.

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