Final answer:
It is false that the direct write-off method estimates the amount of bad debts before they occur. This method accounts for bad debts only after they are confirmed uncollectible, whereas the allowance method anticipates future bad debts and makes provisions in advance.
Step-by-step explanation:
The statement that the direct write-off method estimates the amount of bad debts before they occur is false. The direct write-off method is an accounting approach used to account for bad debts only after a specific account is deemed uncollectible. This means the company does not estimate bad debt expenses in advance; instead, it writes off specific customer balances when it is clear that the customer will not pay.
In contrast, the allowance method requires estimating uncollectible accounts at the end of each accounting period, which involves anticipating future bad debts and recording an allowance for doubtful accounts. The direct write-off method does not employ this prediction and hence fails to match expenses with revenues in the periods in which they are incurred, which contravenes the accrual basis of accounting.
Consequently, the direct write-off method is not compliant with Generally Accepted Accounting Principles (GAAP) when it comes to the handling of credit sales and is not recommended for businesses with a significant amount of receivables.