The Disadvantages of Direct Write-off Method

Direct write-off mainly refers to the recording of non-recoverable voicings. Companies often sell credit and wither Receivable, with expectations obtained from customers over time. However, some removable may become I can’t be recovered at some point. Companies can estimate at the time of the credit sale the number of readable that may be at risk or directly wipe out any removable that have not been collected after it occurs. The method of the direct wipe is very simple and practical, without estimation. But it has certain drawbacks in reporting the cost of bad rehabilitation and the value of reliability, as well as income in general.

Uncollectible Accounts
A common practice is that at the time of the credit sale, companies give an estimate of the percentage of total renewables that can be proved I invoice at a later time. The companies then indirectly set up provisions for the claims as a negative for removable and at the same time recorded a bad removable debt cost during the sales period. However, using direct wipe-out, companies only record difficultly removable when some renewables are truly I can’t be recovered.

Mismatched Expense
Any unsymedited debt costs due to liability that have not been recovered are related to the initial credit turnover. But using direct wipe-out, companies won’t record a hard-to-claim removable debt cost until the later stage after they argue that some reliabilities are I can’t be recovered. Therefore, the cost of bad romance debt is recorded as inconsistent with the sales revenue of the following period, does not match the cost of bad removable and the initial credit sales revenue.

Overstated Receivable
Reach romances are an asset account, and companies report the value of various Receivables according to the indirect backup method and direct wipe-out method. With removable provision accounts, companies report the book value of remembrance enables by reserve number, reflecting the real, workable value of renewables. Using direct wipe-out, companies exaggerate the value of removable when some romances are no longer recoverable but have not been wiped out.

Manipulated Earnings
Unlike the backup method that records can’t be recovered at the time of sale, the direct wipe-out method allows companies to choose the amount of time they want to erase any hard-to-revoicing removable, potentially causing income manipulation. If earnings fall, companies can delay the write-off of I can’t recoverable reusables to avoid further reductions in reported earnings. Due to such limitations in the use of direct deletion, this method is usually not used unless the amount that cannot be collected is not important.