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Without the balance sheet account, Allowance for Uncollectible Accounts, all of the accounts receivable are assumed to be collectible and there is no bad debt expense reported on the income statement until an account receivable is written off. This approach is known as the direct write-off method. (When an account is written off, the entry will be a debit to Bad Debt Expense and a credit to Accounts Receivable.)When the account Allowance for Uncollectible Accounts is reported on the balance sheet, the companyanticipates that some of its accounts receivable will not be collected. In other words, without knowing specifically which account will not be collected, the company debits Bad Debt Expense and credits Allowance for Uncollectible Accounts. This results in an expense on the income statement (sooner than would occur under the direct write-off method) and a reduction of the current assets on the balance sheet. (When an account is written off under the "allowance" method, the entry will be a debit to Allowance for Uncollectible Accounts and a credit to Accounts Receivable.)
Reported net profit for the period end will be overstated by the amount that should have been provided as provision expense for doubtful accounts receivables for that same period.
However, such allowances are only established when we can be able to reliably assess the longivity of all accounts receivables to determine that.
