Question

There is a method that is sometimes not permitted when accounting for uncollectible receivables. Identify this method and describe the circumstance where it is and is not permitted

Answer 1

Under US GAAP, the accounting of uncollectible is allowed when there is reliable estimate of such bad debts. However, the direct write off method is violated under GAAP.

The direct method method usually writes off bad debt when such uncollectible is identified. However such method is not recognized under the GAAP because it violates the matching principle. Under matching principle, all expenses shall be matched with the revenues earned during that period. The revenue earned from credit sales during a period shall be matched with the bad debt expense in that period. Hence, there must be a reliable estimate of bad debts and recorded in the year of credit sales. However, in write off method, the bad debt expense is recorded usually in the next accounting period when such account is determined to be uncollectible.

Hence, the direct write-off method is not permitted under GAAP.