Answer to Question #290172 in Accounting for Trenda

Question

This is an Accounting Question.

Compare and contrast the direct write-off method and the allowance method for bad debts. When is the expense for uncollected accounts receivable recognized under each method? Why is the direct write-off method not considered to follow generally accepted accounting?

Answer 1

The direct write-off method is an accounting method by which uncollectible accounts receivable are written off as bad debt. It recognizes bad accounts as an expense at the point when judged to be uncollectible. The allowance method provides in advance for uncollectible accounts by setting aside a reserve for bad debts that are expected in the future. The expense for uncollected accounts receivable is recognized at the point when judged uncollectible in direct method, and estimated at the end of the year in allowance method.

The direct method is not considered to follow generally accepted accounting principles because it does not adhere to the matching and accrual concepts; GAAP mandates that expenses be matched with revenue during the same accounting period, whereas the direct method distorts against this principle - the balance sheet will report more revenue than was generated.