Accounts Receivable: Write off vs Allowance method

May 21st, 2016
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Accounts Receivable: Write off vs Allowance method

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QUESTION 1Advantages of direct write off methodEasy to use. Unlike the allowance method, there is no estimation with direct write-off: asingle a journal entry is all thats required.Estimations are neither fool-proof nor perfect; that is why they are called estimations.Predictions are prone to failure, and there is nothing inherently superior to estimating baddebts that may or may not be collectible.Disadvantages of direct write off methodThe allowance method follows proper GAAP guidelines in matching costs with revenuesfor the period in which they were incurred. Direct write-off does not match costs withrevenue for the period. Bad debt expenses might occur in a period after the accountsreceivable balance was reported, which violates the matching principle of generallyaccepted accounting principles.The elimination in subsequent periods of information that might have been used in priorperiods to make investment decisions.Generally results in no statement of how much the company expects to be able to collect(or not collect) from its business venturesIn conclusion, direct write off method results in a skewed balance sheet and reve

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