Theoretical Justification of the Allowance Method As Contrasted With Direct Write-off Method of Accounting for Bad Debts

The Provision Method

The provision method and the direct method are two common techniques typically used by companies to deal with bad debts. Depreciation methods are considered a better alternative to direct depreciation methods because they are based on the principles of accounting reconciliation (Porter and Norton 327). This means that the provision method is justified because the bad debt expense can be recognized in the period in which the related income is realized. Bad debt provision methods evaluate bad debts and recognize bad debts before past due amounts are actually uncollectible. When using this accounting method, bad debts expense is timely recognized because it is probable and can be projected to an accurate extent (Kieso, et al. 353). Therefore, they justify the principle required for acknowledgment of contingent losses. In other words, under allowance technique, a business estimates a bad debt expense in advance and deducts the expense from the allowance account.

The Write-Off Method

On the contrary, in the write-off method, bad debts are directly written off alongside proceeds at a time when they are actually acknowledged as uncollectible accounts receivable. This would involve debiting the expense account and crediting the accounts receivable account (Kieso, et al. 352). Direct write-off technique is normally justified based on its simplicity. For instance, businesses do not have to estimate the accounts that are unlikely to be collected. This is because a debt is written off once the business is certain that it is uncollectible. However, the direct write-off method is not considered a better alternative because it violates the matching principle of accounting. For instance, a business can only be certain that a debt is uncollectible after the end of the accounting period. Consequently, using the direct write-off method forces a business to recognize uncollectible expense, which is partly associated with the preceding accounting period (Porter and Norton 326). Therefore, the use of this method would lead to a deduction of the expense of preceding period against income of present period. This contradicts the matching principle, thus, making the allowance method the best alternative, unless bad debts are immaterial (Porter and Norton 326).

Works Cited

Kieso, Donald E, et al. Intermediate Accounting. Wiley, 2011.

Porter, Gary A., and Curtis L. Norton. Financial Accounting: The Impact on Decision Makers. Cengage Learning, 2016.