Question

Which of the following is a correct statement? Multiple Choice Writing off an uncollectible account under the allowance method decreases net income. Writing off an uncollectible account under the direct write-off method does not affect net income. Estimating uncollectible accounts expense improves the matching of revenues and expenses. All of these are correct statements.

Answer 1

The correct answer is B: direct write-off method

Explanation:

Unfortunately, some sales on account may not be collected. Customers go broke, become unhappy and refuse to pay, or may generally lack the ethics to complete their half of the bargain. It is necessary to establish an accounting process for measuring and reporting these uncollectible items. Uncollectible accounts are frequently called “bad debts.”

There are two methods of accounting to manage uncollectable accounts:

1- Allowance method

2- Direct Write-off Method

2- Under this method, there is no allowance account. An account receivable is written-off directly to expense only after the account is determined to be uncollectible. This method is required for income tax purposes. The direct write-off method is easy to operate as it only requires that specific debts are written off as they are identified with a simple journal. The problem with the method, however, is that it does not comply with the matching principle, in that revenue might be recorded in one period, when the customer is invoiced, whereas the expense of writing off the uncollectible amount is recorded in a completely different period when the amount is identified as irrecoverable.

Answer 2

Estimating un-collectible accounts expense improves the matching of revenues and expenses.

Step-by-step explanation:

When uncollectibles are recorded through allowance method then, bad debts expense is provided, which reduces net income. But at the time of writing off only the allowance and accounts receivables account is affected and not the net income.

When direct method is used then also the net income gets reduced, as bad debt expense and accounts receivables is affected.

And as provided in first para, when estimating and creating the allowance for bad debts, it affects net income, and it also represents the true and fair view of expenses and income.

Thus, statement c is correct.