The two methods of accounting for bad debts are the direct write-off method and the allowance method. When comparing the two, which of the following is true?

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Quizplus · Accepted Answer

The allowance method is less exact but it better illustrates the matching principle. This is because it estimates the amount of bad debt based on historical experience and creates a contra asset account (allowance for doubtful accounts) to offset accounts receivable. The direct write-off method, on the other hand, does not estimate bad debt and violates the matching principle by not recognizing the expense until the account is actually written off. Additionally, the direct write-off method only requires one entry to write off an uncollectible account. Therefore, option A, C, and D are incorrect.

The Two Methods of Accounting for Bad Debts Are the Direct