Uncollectible Accounts Communication Memo

You have been hired as a consultant by a parts manufacturing firm to provide advice in regards to the proper accounting methods the company should use in some key areas. In the area of receivables, the company president does not understand your recommendation to use the allowance method for uncollectible accounts. She stated, “Financial statements should be based on objective data rather than the guesswork required for the allowance method. Besides, since my uncollectibles are fairly constant from period to period, with significant variations infrequently, the direct write-off method is just as good as the allowance method.”

Draft a one-page response to the president, in the form of a memo, to support your recommendations for the company to use the allowance method. In your response, present the positives and negatives of both the allowance and direct write-off methods, and be as persuasive as possible.

Solution Preview

To the President

Pax Manufacturing Company

August 1, 2018

Subject: Why the Allowance method is more appropriate

With regards to your views and reservations on the use of the allowance method as opposed to the direct write-offs method, I wish to draw your attention to the pros that I have gathered in support of the allowance method. I fully acknowledge the fact that the company’s collectibles are fairly constant from time to time with infrequent variations. However, to adjust the accounts receivables books and the balance sheet, this method is highly recommended because of the uncertainty factor attached to bad debts.

(309 words)