A company has significant bad debts.Why is the direct write-off method unacceptable?
A)Direct write-offs would be immaterial.
B)It is not allowed for tax reasons.
C)It is not in accordance with the accrual method of accounting.
D)Assets will be understated on the balance sheet.

Question

Quizplus · Accepted Answer

The direct write-off method is not in accordance with the accrual method of accounting, which requires that bad debts be estimated and recorded as an expense in the period in which the related revenue is recognized. This method also fails to match expenses with revenues and does not provide an accurate portrayal of the company's financial position because it only records bad debts when they are deemed uncollectible, which could result in an understatement of liabilities and an overstatement of assets on the balance sheet.

A Company Has Significant Bad Debts