A company recently allowed customers to make purchases on credit, terms is 2/10, n/30. The company has found that not all of its customers pays their bill on time. Can the company estimate an allowance for uncollectible accounts and match this bad debt expense against credit sales. On the financial statement, the allowance for uncollectible accounts is classified as a current liability.

What is the potential accounting problem?

Allowance for uncollectible accouts is not a current liabilty but an offset to accounts receivables.

It is a Contra Accounts Receivable Account and is used to show the net realizable amount that is expected to be received by the company.

Allowance for Bad Debt Accounts is a "Contra Asset" account that represents Accounts Receivable and is shown on the Balance Sheet. Because Allowance for Bad Debt Accounts is a Contra Asset account it has a normal Credit Balance, hence the term "Contra" or Contrast.

There are a few methods to write off Bad Debt Expense, one is the direct write off method. When a company determines the amount that will not be collected, they write that amount off in that fiscal year. At this point, the company writes off the bad debt expense, by debiting the expense account and crediting the appropriate account receivable. This is the simplest way to write off Bad Debt.

The next method is the Allowance Method: According to http://www.wikicfo.com/Wiki/Default.aspx?Page=Allowance%20for%20Uncollectible% 20Accounts%20&NS=&AspxAutoDetectCookieSupport=1

Another way to record bad debt expense or uncollectible accounts in the financial statements is by using the allowance method. This method adheres to the matching principle and the procedural standards of GAAP.

In the allowance method, a company estimates the amount of uncollectible accounts it will incur as a percentage of credit sales and then applies that percentage to credit sales as the revenues are earned. In this way the allowance for doubtful accounts matches with the revenues. Even though this method uses estimation – as opposed to the direct method which writes off bad debt when the actual amount is known – the estimates may not always be entirely accurate. However, this method adheres to the matching principle so it is the method approved by GAAP.