Valuation Of Accounts Receivables Watch A. Mursaus Youtube

Valuation of Accounts ReceivablesStudent NameCourseInstructorDate Most companies employ the use of direct write-off and the allowance methods to account for bad debt expense. Direct Write-off Method versus the Allowance MethodDirect write-off method includes writing off an account upon realization that a customer cannot pay. Although the method is simpler, it has many drawbacks that ensure small business refrain from using it. First, the method violates the matching principle. This happens as bad debt expense happens after recording the initial sale, which goes against the matching principle of GAAP. The method includes recording the receivable amounts upon selling. Therefore, failure to collect the full amount raises the reported receivable balance. In addition, the method records inaccurate profits. This happens in situations when bad debt expense happens later than its related revenue, which leads to inaccurate profit information on the income statement. Lastly, the method creates room for potential abuse in terms of manipulation (Keela, n.d). The advantages include the method’s simplicity and the ability to save time during the preparation of the tax return (Bryan and Sinnet, 2005). Allowance methodIn comparison, the allowance method is