explain why the allowance method is used for financial statement purposes rather than the direct write-off...

explain why the allowance method is used for financial statement purposes rather than the direct write-off method.

Expert Solution

explain why the allowance method is used for financial statement purposes rather than the direct write-off method

Answer: Under Allowance method, an estimate of the future bad debts are assessed and are provided against the collectibles. However, incase of Direct Write off method, a bad debt is charged as expense in the Income Statement as soon as it is evident that the collectibles are defaulted and are not receoverable.

Under the Allowance method, the assessment of estimate is made immediately after the sale and hence any provision or adjustment is made immediately in the respective financial year; However, incase of Direct Write off method, the expense is considered only in the financial year in which the evidence is established.

Going by the Concept of Prudence in accounting, it is advised to assess the risk profile of assets (collectibles) and provision be considered in books to reflect the correct accounting reflection, on periodic basis. Hence, Allowance method is used rather than the direct write off method.

jeff jeffy answered 2 years ago

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