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

Question

Quizplus · Accepted Answer

The allowance method is preferred over the direct write-off method because it provides improved matching of bad debt expense with revenue. The allowance method estimates the amount of bad debts and records it as an expense in the same period as the related revenue. The direct write-off method does not provide proper matching and delays expense recognition until the account is deemed uncollectible, which can misrepresent the financial statements. Additionally, determining worthless accounts under the direct write-off method is easy but it does not comply with Generally Accepted Accounting Principles (GAAP). The allowance method is also used for financial statement purposes, not just for tax purposes.

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