Difference Between Allowance Method And Direct Write Off Method

Here, we will focus on Allowance Method VS Direct Write Off Method.

1. Under Allowance Approach, we estimate for Uncollectible Accounts and adjusting the actual sales with estimated sales at the End of Current Accounting Period in order to know the exact real sales made by business while under Direct Write Off Method, we does not follow any estimation of Unpaid dues and only recognize these Uncollectible Accounts Expense when these become Actual Bad Debts that needed to be Written Off.

2. Allowance Method follows Matching Principle Gaap i.e., matching our sales with Uncollectible Accounts Expense during the Current Accounting Cycle while Direct Off Method fails to follow Matching Principle as there is no record of estimation of Uncollectible Accounts Expense.

3. Allowance Method is widely used by most of the companies where goods sold on both Cash Basis and Accrual Basis of Accounting while Direct Write Off Method is used by those companies where usually goods are sold on Cash Basis.

4. Examples of Companies For Allowance Method are Manufacturing Concerns while for Direct-Off Method, examples are Accounting Firms, Consultancy Firms, etc.

You Can Also Read Out, “Cash Basis VS Accrual Basis of Accounting”

5. Direct Write Off Method VS Allowance Method Journal Entries

Under Write-Off Approach, no Adjusting Entries are passed in order to Estimate Write off Accounts Receivable. Only, when it is sure that a certain unpaid invoices will be Uncollectible or become Actual Bad Debts Written Off, then the company record following Journal Entry:

                                           Bad Debts Expense a/c   XXX


                                                                            Accounts Receivable a/c    XXX

Whereas under Allowance Method or Provision Method, the company makes an estimation of Uncollectible Accounts either by using Income Statement-Approach or Balance-Approach. So, there is a proper estimation of Unpaid invoices to record reliable information related to Credit Sales.

Why is the Allowance Method Preferred Over The Direct Write Off Method?

Or

Allowance Method Versus Direct Write Off GAAP

In final words, Allowance Method is far better than Direct Write Off Method if the company adopts Accrual Basis of Accounting or in other words when the companies make sales or render services on credit basis because Allowance Approach provides true and fair view and reliable position for Accounts Receivable by adjusting Allowance for Doubtful Accounts with Accounts Receivable ( Net Realizable Value ) on Balance Sheet at the end of Current Accounting Period and hence follow Matching Principle Gaap i.e., matching sales with Uncollectible Accounts Expense during the Accounting Cycle while Direct Off Method fails to provide reliable information about Actual Value of Accounts Receivable and does not follow Matching Principle of Generally Accepted Accounting Principles and hence Users of Financial Statements can not trust on such information relating sales and Accounts Receivable. However, Direct Write-Off Method is mostly suitable for those organization which adopted Cash Basis of Accounting. e.g. Accounting Firms, Consulting Services Organizations, etc.