Wat advantages and disadvantages ofapplying the direct writeoff allowance method

Accounting
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discuss the primary advantages and disadvantages of applying the direct write-off and the allowance method of writing off accounts.

Dec 7th, 2014

advantages and disadvantages of applying the direct write off allowance method

Advantages

First, the source transaction that produced the revenue must be complete. 

Second, the revenue’s numerical value must be calculable. 

Third, there must be no doubt that the sum can be collected. 

Fourth, Such revenues are recorded as accounts receivable on the balance sheet and are deducted as bad debt expense on the income statement should their values become unrecoverable. 

Fifth, Bad debt expense is incurred when a sum owed to the business and thought to be collectible becomes unrecoverable. 

Disadvantages

1. Companies often make credit sales and retain accounts receivable, expecting to collect them from customers over time. 

2. However, certain accounts receivable may become unrecoverable at some point. 

3. Companies can either estimate at the time of the credit sales the amount of accounts receivable that may be at risk or directly write off any uncollected accounts receivable later as it happens. 

4. The direct write-off method is simple and factual, involving no estimates. 

5. It does have certain disadvantages in reporting the bad debt expense and accounts receivable value, as well as earnings in general. 

Dec 7th, 2014

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Dec 7th, 2014
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