Business Finance
Bad Debts

Question Description

How are bad debts accounted for under the direct write-off method? What are the disadvantages of this method?

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Final Answer

Using the direct write-off method, companies record a bad-debt expense only when certain accounts receivable have become actually uncollectible. 

Possible disadvantage : Mismatched Expense 

Any bad-debt expense as a result of the uncollected accounts receivable is associated with the original credit sales. But using the direct write-off method, companies might not record a bad-debt expense until a later period when they deem certain accounts receivable as uncollectible. Consequently, the bad-debt expense is inappropriately recorded against the revenue of sales from a later period, mismatching the bad-debt expense with the revenue of the original credit sales.

Carnegie Mellon University

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