Question

Why is the direct write-off method of accounting for bad debts typically not used by businesses?

Answer 1

A direct write-off method of accounting for bad debts is typically used in business when debt cannot be collected from client. In this scenario bad debt expense is debited and account receivable is credited. It is one of the methods of accounting for bad debts.

There are various disadvantages of direct write-off method of accounting due to which it cannot be used by business:

1) Does not agree with matching principle - Expense to be written off might occur in the same period when there is initiation of sale. This fact is not in accordance with matching principle.

2) Account receivable is overstated - In case of money not collectible, account receivable becomes high. Hence account receivable is overstated.

3) Instigates abuse - The direct method creates atmosphere for manipulation of accounts. Company waits for decision to write off bad debt amount and in the meantime figures get fabricated. This causes delay in the process of writing of the bad debt expense.