In accounting for credit losses: Select one: A. The allowance method matches losses with related sales better than the direct write-off method B. The direct write-off method involves estimating credit losses C. The direct write-off method consistently understates assets on the balance sheet D. Both B and C

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Kimberly Schroeder

Business

9 January, 02:35

In accounting for credit losses: Select one: A. The allowance method matches losses with related sales better than the direct write-off method B. The direct write-off method involves estimating credit losses C. The direct write-off method consistently understates assets on the balance sheet D. Both B and C

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Davian Pratt · Answer 1

A. The allowance method matches losses with related sales better than the direct write-off method.

Explanation:

Credit losses refers to those losses which arise as a consequence of an enterprise extending credit to it's customers. This is in the form of default by customers upon payment, termed as bad debts losses.

Under the allowance method, a percentage of sales which is estimated as non recoverable is provided for as Bad debts for the current period and recorded via an adjusting entry at the end of accounting period.

It represents a provision created against debtors as doubtful debts. This is an estimation. Later when such bad debts are confirmed, following journal entry is passed:

Allowance for Bad and doubtful debts Dr.

To Accounts Receivables

(Being loss on account of bad debts recorded)

Under direct write off method, bad debts losses are directly written off as and when they occur and no allowance or provision is made in advance against them.