Question

why is the allowance method preferred over the direct write off method? Explain in detail.

Answer 1

The direct write off method does not relate the bad debt expense to the period in which the relevant credit sale occurred. In other words, the credit sale which gave rise to the bad debt, may have occurred in an earlier accounting period, with the result that the matching concept is not followed while accounting for the bad debt expense. This is not correct accounting practice and it will not give the correct income for the period.

In contrast, the allowance method provides for the accounting of estimated bad debts expense for credit sales and the expense is accounted as 'bad debt expense' with the contra credit going to 'allowance for doubtful accounts'. When debts become bad, the bad debt amount is set off against the allowance. This procedure will ensure that the bad debts expense, though estimated, will be accounted for in the same year in which, the credit sale occurred.

The allowance method, hence, has the following advantages:

*It ensures that the matching concept is followed in the accounting of bad debt expense, and

*It makes more control possible, as estimates of bad debts expense are made on the basis of an assessment of the likely bad debts expense, and the actual bad debts are written off against the estimate.

The method is preferred for the above reasons.