Question

The direct write-off method of accounting for bad debts uses an allowance account. uses a contra asset account. is the preferred method under generally accepted accounting principles. does not require estimates of bad debt losses.

Answer 1

Answer:

The correct answer is letter "D": does not require estimates of bad debt losses.

Explanation:

There are mainly two approaches while recognizing bad debts (unpaid debts):  the allowance method and the direct write-off method. Using the allowance method the unpaid account receivable goes through a series of stages until it is recognized as a bad debt. There are no set criteria to do so. When the firm eventually recognizes and calculates the amount of a bad expense, it is recorded in an allowance account. The negative balance diminishes the company's revenue.

The direct write-off method does not generate any allowance account. The account receivable is simply written-off after the company determines the debt as uncollectible. Thus, there is no need to estimate bad debt losses using this approach.