Select your language

Suggested languages for you:
Log In Start studying!
Answers without the blur. Just sign up for free and you're in → Illustration

Q11RQ

Expert-verified
Horngren'S Financial And Managerial Accounting
Found in: Page 465

Short Answer

What are some limitations of using the direct write-off method?

Answer

  1. It is against the matching principle.

  2. Over-estimation of the receivables.

See the step by step solution

Step by Step Solution

Step 1: Definition of the Accounts Receivables

The accounts receivables report the sales amount for which payment is still due from the customer. It is considered a current asset of the business as the entity expects to receive it within one year.

Step 2: Limitations of the direct write-off method

  1. The direct-write-off method does not comply with the matching principle and is also not accepted under GAAP. The matching principle states that expenses must be recorded when revenue is earned, but under the direct write-off, method expenses are recorded in the future months.

  2. Under the direct write-off method, receivables are overstated on the balance sheet because the estimated bad debts are not adjusted against the accounts receivables.

Most popular questions for Business-studies Textbooks

Icon

Want to see more solutions like these?

Sign up for free to discover our expert answers
Get Started - It’s free

Recommended explanations on Business-studies Textbooks

94% of StudySmarter users get better grades.

Sign up for free
94% of StudySmarter users get better grades.