Why is the allowance method preferred over the direct write-off method of accounting for bad debts?
A) Allowance method is used for tax purposes.
B) Estimates are used.
C) Determining worthless accounts under direct write-off method is difficult to do.
D) Improved matching of bad debt expense with revenue.

Question

Quizplus · Accepted Answer

The allowance method provides a better matching of bad debt expense with revenue as it is based on estimated losses, while the direct write-off method only records actual losses after they occur. This makes the allowance method more accurate and reliable for financial reporting purposes. The other options (A, B, C) are not correct as they do not explain why the allowance method is preferred over the direct write-off method.

Why Is the Allowance Method Preferred Over the Direct Write-Off