Question

The following list describes aspects of either the allowance method or the direct write-off method to account for bad debts. For each item listed, indicate if the statement best describes either the allowance (A) method or the direct write-off (DW) method.

5. Sales and any bad debt expense are usually not recorded in the same period; thus, proper matching (of revenue and expense recognition) does not consistently occur.

Short answer

The correct answer is the Direct write-off (DW) method.

Step-by-step solution

Introduction

Sales are the type of item reported under the income statement of an organization. It implies the revenue received from the sale of merchandise in the potential market by the organization.

Reason for the correct answer

When recording the bad debt transaction according to the direct write-off method, the sales and the bad debt are not recorded during the same accounting period because the amount of bad debt is set off against the cash received from the debtor. Therefore, it violates the accounting principle of revenue and expense recognition.