Of what merit is the contention that the allowance method lacks the objectivity of the direct...

Of what merit is the contention that the allowance method lacks the objectivity of the direct write-off method? Discuss in terms of accounting's measurement function.

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Solution:

Allowance method lacks the objectivity of the direct write-off method because in case of allowance method management may adjust their estimates of allowance in order to manipulate their earnings.As a result the management would either increase or decrease their estimate of allowance of uncollectible accounts to either decrease or increase their profit respectively.

For example if a company has a profitable year it would overestimate the amount of bad debts thereby reducing their income in the current year.However in the next year if the profit declines , the company would underestimate the amount of bad debts to reduce their expenses which will increase their income.

This is not the case in direct write off method as each year the actual bad debts are written off and no estimates are made.Therefore it can be said that direct write off method is more objective than allowance method.

ekkarill92 answered 1 year ago

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