Question

What is the direct write-off method? Is it supported by GAAP? Why, or Why not?

Please no hand-written answers. I do not like translating hand-writing. Thanks.

Answer 1

Direct write off method is a method for recognizing bad debts expenses,unser this method bad debt expenses are recognized immediately and there will be no allowances account and account receivable is written off directly to an expense called bad debt after an account is known to be uncollectible

In this mehtod accounts are written off only when they are uncollectible,but accounting under GAAP requires to estimate an amount of doubtful debts each period.

In this method accounts are written off immediately after they are known to be uncollectible, this might happen after the initial sale was recorded which voilates the MATCHING PRICIPLE of GAAP

Matching principle requires the businesses to record the revenues and corresponding expenses in the same accounting period

GAAP allows direct write off method only to write off insignificant accounts

Direct write off method overstates the Account receivables,calculates inaccurate profits etc.,

In simple words, direct write off method voilates the Matching principle of GAAP , so it should not be used and it can be used only to write off insignificant accounts.