A primary disadvantage of the allowance method of recording bad debts, compared to the direct write-off method, is that:
A) The allowance method gives a higher value of the company's accounts receivable asset.
B) The allowance method requires estimation.
C) The allowance method provides worse matching of revenues and expenses.
D) The allowance method provides users with less relevant information.

Question

Quizplus · Accepted Answer

The primary disadvantage of the allowance method of recording bad debts, compared to the direct write-off method, is that it requires estimation. The allowance method involves estimating the amount of bad debts that will arise in the future, which can be difficult and subjective. The direct write-off method, on the other hand, records bad debts only when they actually occur and are known, which eliminates the need for estimation. While the allowance method may provide better matching of revenues and expenses and more relevant information, the disadvantage of estimation is a significant drawback.

A Primary Disadvantage of the Allowance Method of Recording Bad