In addition to the Cash-Basis and Accrual Methods, there is the “Direct Write-Off Method” and the “Allowance Method” for recording and the tracking accumulations of Bad Schuld in Accounts Uncollectible. Remember, Bad Schuld is Schuld that has no chance of paying paid with Kapital by the Borrower who owes Kapital. Thus, it is oftentimes the Lender who becomes forced to pay off the Schuld. One may be forgiven for not realizing the implications of Bad Schuld to the previous Entry that discussed it.
In a political-economic system where most of the wealth is generated borrowing and lending Kapital to create more Kapital, this trend can and will happen more often than one may be inclined to believe. Privatized commercial firms maintain a “Line of Credit” to readily access Kapital from the Fractional-Reserve Banking System in a manner comparable to the Private Citizen’s usage of a “Credit Card” within Civil Society. At the same time, there are other privatized commercial firms whose economic activities is only facilitated from leased land, buildings, vehicles, and equipment.
Direct Write-Off Method
The “Direct Write-Off Method” entails a waiting period become assuming any Quantity of Schuld becomes uncollectible as Bad Schuld. When the assumption becomes apparent, it is then recorded as Expenses that impact the Assets of an Economic Organization. This in turn signifies that the Quantity of Schuld will no longer be redesignated as a Quantity of Kapital.
The three tables below describe how an Economic Organization had produced $250 USD worth of finished goods for a customer that somehow failed to pay $250 USD. The Bookkeeper reports that information to the Accountant, who wrote an entry stating that $250 USD was incurred on the Economic Organization. The Economic Organization received $250 USD for a Quantity of Schuld that originated from the creation of Bad Schuld. The Quantity of Schuld is reflected in the Accounts Receivable held by the Economic Organization.
Later, the customer in question decided to pay $50 USD. That $50 USD is a Quantity of Kapital which was then used by the Accountant to reduce the Bad Schuld by adding it to the Accounts Receivable of the Economic Organization. Two entries were subsequently included in the Daybook Journal, followed by the Financial Ledger. One entry shows the customer paying the Economic Organization a total of $50 USD, a Quantity of Kapital which was then used to reduce the Bad Schuld by $50 USD because the customer decided to partially pay off the Quantity of Schuld.
Allowance Method
For most privatized commercial firms among the Market/Mixed Economies of Liberal Capitalist Parliamentary Democracies, the Direct Write-Off Method is not the preferred accounting method of recording Bad Schuld. That distinction goes to the “Allowance Method.” The Allowance Method differs from the Direct Write-Off Method by having the Economic Organization anticipate the accumulation of Bad Schuld as a knowable Quantity of Schuld. It does not wait until somebody fails to pay off the Schuld with Kapital, admittedly recognizing someone’s factual inability to pay at the time of a given transactional sale.
The reason for why the Allowance Method is preferred over the Direct Write-Off Method is partly due to the former being internationally recognized as part of the aforementioned “Generally Accepted Accounting Principles (GAAP).” Larger Economic Organizations tend to prefer the Allowance Method to sustain larger volumes of transactional sales, allowing their Accountants to keep track of any Bad Schuld as they occur.
The other reason is to ensure greater accountability by having Accountants maintain up-to-date records of transactional sales. Most privatized commercial firms have Quantities of Kapital and Schuld which can be monitored by Parliament, Investors at the Financial Markets, Lenders of privatized commercial banks, employees affiliated with Labor Unions. In other words, the Allowance Method is designed to provide a more comprehensive description of the financial health of a privatized commercial firm based on how well it achieves “‘the greatest Quantity of Kapital for the least Quantity of Schuld.’”
The following table is a demonstration of the Allowance Method for another Economic Organization. Unlike the one that employed the Direct Write-Off Method, this Economic Organization had established a special Contra Account called the “Allowance for Doubtful Accounts” for handling accumulations of Bad Schuld. $600 USD was recorded as Bad Schuld, which was then added toward the Allowance for Doubtful Accounts. From Accounts Receivable, $600 USD was then spent by the Economic Organization to pay off the Bad Schuld loaded in the Allowance for Doubtful Accounts.
Categories: Work-Standard Accounting Practices
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