Question

Does your company have written policies and procedures on how to perform your business processes? What are internal controls and how does it impact policies and procedures?

What is the drawback of the direct write-off method?

Answer 1

Yes. Every business should have written policies and procedures as a written statement clearly states what are things that needs to be dome in an organisation. It is applicable for both a large and a small corporation. It helps the employees to be acquainted with the different goals of the organisation, and what standards of action are needed and the kind of behaviour the employees should exhibit.

Internal control helps an organisation make sure that the employees are following all the policies and procedures of the company , which helps in it's smooth functioning. Internal controls provide an environment in which managers and staff can maximize the efficiency and effectiveness of their operations. The impact of internal control is that the quality of individual controls and how well employees adhere to control rules, policies and procedures can affect a business in a positive or negative manner.

Internal controls system provide a mechanism for management to monitor the achievement of operational goals and objectives, well designed internal controls protect assets from accidental loss or loss from fraud.

A disadvantage of direct write off method is that, companies can use this  for for expense manipulation as expenses and revenues are recorded in different periods and this violates with the matching principle of the US GAAP.

The direct write off method can overstate the profits from sale , it can understate profits when a loss is written off and in between it can overstate the accounts receivable. Under this method there is no allowance account. Rather, an account receivable is written-off directly to expense only after the account is determined to be uncollectible.It can even make a bankrupt company look financially sound.

The US GAAP, does not allow this method to be sued as it does not use a allowance account to reduce accounts receivables.