Q1: Described the ‘allowance’ method for recording bad debts expense and how it differs to the ‘direct write-off’ method.

A:

Under the ‘allowance’ method, we estimate our bad debts in advance (ie before we know the particular customers (that owe us money) who are not going to pay us. We do this at the end of each period.

This differs to the ‘direct write-off’ method which involves not recognising bad debts until we know the particular customers who are not going to pay us. (Study Guide Chapter 5 Section 5-1, page 5-5).