Advantages And Disadvantages of the Direct Write Off Method

Direct Off Method has some advantages and some disadvantages (Weaknesses).

These are briefly explained below:

Benefits / Advantages of Direct Off Method

1. The main advantage is that it is easy to follow as there is no need of estimating of Uncollectible Accounts. Only when the company has sure that unpaid amount become Actual Bad Debts that need to be written off.

You Can Also Read Out, “Advantages And Disadvantages of Allowance Method”

2. It is less expensive and time consuming as there is no need to prepare Accounts Receivable Aging Report. If there are large number of customers’ data which is costly for Accounting Department i.e. more work and time is required and highly salaries are required for doing that work.

3. This method is suitable for those organizations whose deals with their clients on Cash Basis i.e. Cash is received when services are delivered to customers. Examples of Such Organizations are Professional Bodies who receives fees from their client against their services. These Professional Bodies does’t need to estimate Uncollectible Accounts as all the transactions take place on Cash Basis. Examples are Accounting Firms which receives fees against services, Doctors who receives fees against medical treatment, etc.

Weaknesses / Drawbacks / Limitations / Disadvantages of Direct Off Method

1. This approach fails to provide reliable data as credit sales may not be completed i.e., unpaid invoices remain due and hence Accounts Receivable overstates which is not clear so the business will suffers a loss if the customer fails to pay. Moreover, it is against the Matching Principle of Generally Accepted Principle (GAAP) that says revenues (Sales here) of the Same Accounting Period must be set off with all the expenses (Here Uncollectible Accounts Expenses) incurred in earning these revenues. So, Financial Statements does not show true and fair view information to the Users of Financial Statements.

2. This system is not suitable where large number of Business Transactions take place on Credit Basis i.e., Accrual Basis of Accounting.

So, we can say that in-spite of the advantages and disadvantages of Direct Off Method, this method is suitable only for Cash Basis of Accounting where all the Business Transaction take place on Cash Basis. Examples of Organizations adopting Cash Basis of Accounting are Accounting Firms, Consulting Services, etc.