Question

Of what merit is the contention that the allowance method lacks the objectivity of the direct write-off method? Discuss in terms of accounting’s measurement function.

Short answer

In comparison to the allowance method, the direct write-off method proves to be more objectivebut it is also not fully objective.

Step-by-step solution

Definition of Fair Representation

Fair representation can be defined as the representation of the financial information of the business entity that does not contain any material misstatement.

Merits of direct write-off method

Under the allowance method of reporting bad debts, the business entity estimates the number of uncollectible assets or accounts receivables based on previous experience. While under the direct write-off method, the bad debts are recognized at the time when they are uncollectible, which provides more accurate financial information. Therefore, the direct write-off method proves to be more objective than the allowance method.

Although the direct write-off method provides more accurate information that assists fair representation, but it is also not fully objective because this method also requires judgment regarding the time when a specific account receivable has become uncollectible.