Final answer:
The direct write-off method is not allowed by GAAP as it writes off bad debts at the time they become uncollectible. This method violates the matching principle and may overstate assets by not anticipating future uncollectible debts.
Step-by-step explanation:
The method for recognizing bad debts that is not allowed by GAAP (Generally Accepted Accounting Principles) is the direct write-off method. This method writes off bad debts only at the time they actually become uncollectible, rather than estimating bad debts in advance. An example of an entry for this method would be debiting the Bad Debt Expense and crediting Accounts Receivable for the amount deemed uncollectible.
The two problems with the direct write-off method are:
- It often fails to match bad debt expenses to the periods in which the related sales were made, which is in violation of the matching principle.
- It does not provide for the anticipation of future bad debts, potentially overstating assets if the receivables cannot be collected.