Discuss the differences between the allowance method and the direct write-off method

Discuss the differences between the allowance method and the direct write-off method for recording uncollectible accounts. Which of the two is acceptable under financial accounting rules?

Expert Solution

Differences between the allowance method and the direct write off method:

1.Bad debts needed to be recognized when the Accounts receivable is uncollectible.We dont record the estimate about the doubtful accounts receivable from the previous year experience in direct write off method.We record them only when we confirm that they are not going to get collected.

Allowance method will record the estimate of bad debt which may arise from the credit sales made during the year .This is purely judgemental, based on the past experiences the organization have.

2.The credit sale may occur in one year and the bad debts may arise in next year in case of Direct write off method.This will make the profit high in one year and low in the other year.

where as , In case of Allowance method Both the sale and allowance will be recorded in the same period.

3.Direct write of method is not as per the Matching Principle because it does not record the revenues and expenses in the same period.

Whereas the allowance method perfectly matches the accrual concept of accounting and the Matching principle because the allowance is made in the period in which sales are made.

4.Direct write off method is fact based ,where as allowance method is an estimate based.

As per Generally Accepted accounting policies (GAAP),the Allowance method is acceptable under financial accounting as it is as per the Matching principle.

Differences between the allowance method and the direct write off method

Shaik sultan answered 3 years ago

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