Question

Which of the following is not a significant difference between the allowance method and the direct write-off method? Multiple Choice One method requires writing off of uncollectible accounts and the other does not. One method reports net realizable value on the balance sheet and the other does not. One method conforms to GAAP and the other typically does not. One method requires the estimation of uncollectible accounts and the other does not.

Answer 1

Answer:

The correct answer is letter "A": One method requires writing off of uncollectible accounts and the other does not.

Explanation:

Both the allowance method and the direct write-off method are useful to adjust uncollectible accounts receivable on the Balance Sheet. The allowance method of accounting records an estimate of bad debt expenses in a reserve account called the allowance account. Under this method, the net realizable value is reported on the balance sheet. Generally Accepted Accounting Principles rule the allowance method of accounting.

On the other hand, the direct write-off method charges an expense when there is enough reason to believe that an invoice will not be made.

Thus, the least important difference between the two methods of accounting relies on the fact that there are no write-offs in the allowance method of accounting but there are on the direct write-off method.