Two basic methods of accounting for bad debts are the allowance approach and the direct write off approach. Briefly describe the difference between the two. Which is the most preferred by GAAP

Uncertainty in regards of receivables can be accounted for in two ways: Direct write off and allowance.

Under the direct write off approach, any amount that can`t be collected from customers are written as expenses immediately. The expense is taken to income statement. In contrast, allowance approach provide an estimate for uncollectible debt and net it off in the receivable account. It does not take expense the amount immediately.

The most preferred by GAAP is allowance approach. Allowance approach is preferred because it follows the matching concept of pairing income and expense together in the period they occur.

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