One of the weaknesses of the direct write-off method is that it A. understates accounts receivable on the balance sheetB. violates the matching principleC. is too difficult to use for many companiesD. is based on estimates

Question

Gretel

Business

5 December, 17:38

One of the weaknesses of the direct write-off method is that it A. understates accounts receivable on the balance sheetB. violates the matching principleC. is too difficult to use for many companiesD. is based on estimates

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Opie · Answer 1

B. violates the matching principle

Explanation:

The direct write-off method makes an accounting period take the bad debt expense for a sale which occur in a previous period. Therefore this expense was deferred over the accounting periods. This violates the matching principles.

The matching principles states the revenues and expenses should be acknowledge on the period they occur. In this case the bad debt expense, occur on the period of sale but, with the direct write-off method it is recognize on a subsequent period, generating a distorsion on the net income of the present and future accounting cycles.