Which statement is true regarding the direct write-off method for uncollectible accounts?

Which statement is true regarding the direct write-off method for uncollectible accounts?

• A. The direct write-off method is the preferred method for financial accounting purposes because it matches the bad debts expense with the revenue in the same period.
• B. The direct write-off method affects the net realizable value of accounts receivable but not the gross amount of accounts receivable.
• C. The direct write-off method involves debiting the bad debts expense account and crediting the accounts receivable account for the amount of the uncollectible accounts.
• D. The direct write-off method is required for income tax purposes because it recognizes bad debts only when specific accounts are uncollectible.

Answer: (C)

The direct write-off method records bad debt only when a specific account is known to be uncollectible, by removing that amount from assets and recognizing an expense for the loss. The exact entry is to debit bad debts expense and credit accounts receivable for the uncollectible amount. This reflects the idea that no further cash will be received from that customer, so the company writes off the receivable and records the loss in that period. This approach is not the preferred method for financial reporting because it does not estimate uncollectibles in advance, so it may not match revenues with the associated expenses in the same period. Since there is no allowance account, the write-off directly reduces the gross accounts receivable, and the expense is recognized later when the specific bad debt is identified. The statement that the write-off affects only the net realizable value but not the gross amount is not accurate, because gross accounts receivable is reduced when the write-off occurs. Regarding taxes, whether this method is required or permitted varies by jurisdiction; some tax rules allow it, but it is not universally required.

The direct write-off method records bad debt only when a specific account is known to be uncollectible, by removing that amount from assets and recognizing an expense for the loss. The exact entry is to debit bad debts expense and credit accounts receivable for the uncollectible amount. This reflects the idea that no further cash will be received from that customer, so the company writes off the receivable and records the loss in that period.

This approach is not the preferred method for financial reporting because it does not estimate uncollectibles in advance, so it may not match revenues with the associated expenses in the same period. Since there is no allowance account, the write-off directly reduces the gross accounts receivable, and the expense is recognized later when the specific bad debt is identified. The statement that the write-off affects only the net realizable value but not the gross amount is not accurate, because gross accounts receivable is reduced when the write-off occurs. Regarding taxes, whether this method is required or permitted varies by jurisdiction; some tax rules allow it, but it is not universally required.