Accounting for IGCSE & O level - The Fundamentals Of Accounting (Section 26 - No. 11)
What effect does the direct write-off method have on the financial statements compared to the allowance method, in terms of accounting for uncollectible debts?
Under the direct write-off method, net income can be more volatile.
The direct write-off method generally results in a more accurate estimate of bad debt expense.
The allowance method requires a provision for doubtful accounts to be created.
The direct write-off method is generally consistent with the matching principle.
Explanation
The allowance method, because it accounts for bad debt expense estimates, generally offers a more consistent view of net income. The direct write-off is simpler, but results in poor matching of expense and revenue.
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