Description
discuss the primary advantages and disadvantages of applying the direct write-off and the allowance method of writing off accounts.
Explanation & Answer
Advantages of the Direct Write-off Method
The direct write-off method is simple, and can be used by individuals that maintain a company's set of books yet have no extensive accounting education. Unlike the allowance method that estimates probable losses using various ratios and factors, the direct method is based on an actual amount which may be more advantageous to the small business owner.
As a small-business owner, using the direct write-off method instead of the allowance method to account for uncollectible receivables has a number of advantages, the most notable of which is simpler accounting. And if you use the direct write-off method for financial accounting, you'll likely save time when preparing your tax return.Disadvantages of the Direct Write-off Method
Since the direct write-off method records the loss only when the account is determined uncollectible, it may result in a loss from a prior period being charged against unrelated income in a future period. This may result in the distortion of a company's true profit of a given period, and does not comply with GAAP's matching principle, which requires expenses to be matched with their associated revenues within the same period.
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