Question

Which of the following statements is true?

A. Companies with large amounts of uncollectible accounts normally use the direct-write off method to account for uncollectible accounts expense.
B. The primary advantage of using the direct write-off method of recognizing the uncollectible accounts expense is simplicity.
C. Only banks are permitted to use the direct write-off method.
D. The direct write-off method is used to assure the matching of expenses with revenue.

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

Answer: B) A)

Explanation:

• This kind of method, direct write-off method is referring to your question and it is considering a method that is used for recognizing bad debts expenses that are coming from credit sales of someone's account. With this method there is no account that is considering allowance and receivable that is found on someones's account is written-off directly to expense when there is uncollectible account expense.

• One of the greatest advantages is simplicity because those companies who are doing this method have to make only two transactions.