Valuation of Accounts Receivables
- *From the e-Activity, discuss the primary advantages and disadvantages of applying the direct write-off and the allowance method of writing off accounts. Even though the direct write-off method is not acceptable for generally accepted accounting principles (GAAP) reporting, take a position on whether or not estimating the allowance for doubtful accounts distorts gross income. Propose an alternative method to increase the accuracy of reporting. Explain your rationale.
- Identify at least three (3) risk factors inherent in estimating the amount of customer write-offs. Explain the procedural steps in which accountants or auditors would follow to identify where material misstatement of receivables and associated gross income has occurred. Explain your rationale.
Direct write-off method is also known as bad debts. One advantage of this method is that it is quite simple. Companies only make two major transactions for all the amount of the bad debt of customers. Aslo direct write off can write off their bad debts on annual taxes returns. On disadvantage is that there is likely hood of expense manipulation since companies always record revenue and expenses at different times. Also balance sheet for this method is not accurate representation of the account receivable of the company..