What is the difference between direct write-off method and allowance method?

Expert Solution

1) The direct write-off method is used only when we decide a customer will not pay. We do not record any estimates or use the Allowance for Doubtful Accounts under the direct write-off method. We record Bad Debt Expense for the amount we determine will not be paid. This method violates the GAAP matching principle of revenues and expenses.

The allowance method follows GAAP matching principle since we estimate uncollectible accounts at the end of the year. We use this estimate to record Bad Debt Expense and to setup a reserve account called Allowance for Doubtful Accounts.

2)An advantage of using the direct write-off method is that it is simple. Companies only have to make two transactions for the amount of the customer’s bad debt.

An advantage of the allowance method is that it follows the matching principle, which allows for accurate financial record

3)The direct write off method allows a business to record Bad Debt Expense only when a specific account has been deemed uncollectible.

The allowance method creates bad debt expense before the company knows specifically which customers will not pay.

ekkarill92 answered 1 year ago

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