Answer:
2) the limitations of direct write off method are that the bad debts amount owed is directly reported as a loss . It is not treated as an expense.
Explanation:
Best Performance Cell
Journal Entries
Date Particulars Debit Credit
1 June Account Receivable (Anthony Trucking Co.) $ 21000 Dr
Sales $21000 Cr
On June 1, 2018, Best Performance Cell Phones sold $21,000 of merchandise to Anthony Trucking Company on account
15 July Cash $ 5000 Dr
Account Receivable (Anthony Trucking Co.) $ 5000 Cr
On July 15 received only $5,000 of the account receivable.
5 Sept Bad debts Expense $ 16000 Dr
Account Receivable (Anthony Trucking Co.) $ 16000 Cr
Best Performance finally wrote off its accounts receivable from Anthony on September 5.
5 March Account Receivable (Anthony Trucking Co.) $ 16000Dr
Bad Debts Account $ 16000 Cr
Cash $ 16000 Dr
Account Receivable (Anthony Trucking Co.) $ 16000 Cr
Companies must weigh at least two accounting principles when considering the use of direct method.
1) matching principle
2) materiality principle
The matching principle requires that the expenses be reported in the same accounting period as the sales they helped produce. This means that the bad debts must be reported in the period of the credit sales.
The materiality principle states that the amount can be ignored if it is very small in relation to a company's other financial statements such as sales and net income.
