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    Accounts Receivable: allowance vs direct write-off method

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    What is possible "consequence" of using the allowance method rather than the direct write-off method? The method fits the matching principle, is GAAP, the SEC likes it better, sounds better for investors, what could be bad?

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    Solution Preview

    Yes, you are correct about all the good parts of using an allowance method for bad debts. The matching principle is the underlying reason. What could be bad?

    1. The allowance method is an estimate, and the trouble with estimates is that they may be wrong. This year, 2008 going into 2009, may be an example of where an estimate could be a problem. For example, as you prepare your year-end financial statements, you raise your percentage of bad debts under either method because the economic conditions in the world are so bad. You may be so pessimistic that you go a little overboard anticipating the worst in 2009. What if conditions ...

    Solution Summary

    The 437 word solution lists and explains three situations where certain procedures for accounts receivable could be bad. The use of examples helps with understanding the possible problems.