Advantages And Disadvantages of the Allowance Method

Allowance Approach has both advantages and disadvantages in Accounting field. Here are some of the main Advantages and Disadvantages and brief explanation on these points.

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Advantages of Allowance Method

1. This method follows Accounting Principle Gaap as Sales are matched with Uncollectible Accounts Expense in the same period in which sales are recorded on credit basis.

2 This approach provides more details of customers past experiences based on Accounts Receivable Aging Report. The company deal with its customers in a safe mode as it sold goods to only those customers who have good credit outstanding.

3. This method works well where large number of sales are made on credit basis i.e., on Accrual Basis.

Limitations / Disadvantages of Allowance Method

1. This method is expensive and time consuming as more data and employees are needed to record accounting information into Computerized Accounting System. To judge the credibility of customers through Accounts Receivable Aging Report, Customers Past Experiences take into account in case of Larger and heavy amount of Sales.

2. This method is not applicable where Cash Basis of Accounting is applied. Major Professional Bodies such as Accounting Firms, Consulting Agencies follow this System of Accounting.

So, after studying Advantages and Disadvantages of Allowance Approach, we can say that allowance method is suitable where Accrual Basis of Accounting is used while it is unnecessary for those organization where Cash Basis of Accounting is used.