Under the direct write-off method, how are uncollectible accounts accounted for on the financial statements?

• A. Bad debts are recognized only when an account is determined to be uncollectible.
• B. Uncollectible accounts are written off at the time of sale.
• C. Bad debts are estimated and matched to sales in the same period.
• D. An allowance for doubtful accounts is established at the end of each period.

Answer: (A)

Verified step by step guidance

1. Understand the direct write-off method: This method recognizes bad debts only when an account is determined to be uncollectible, rather than estimating bad debts in advance.
2. Review the timing of recognition: Under this method, bad debts are recorded as an expense in the period when the account is deemed uncollectible, not at the time of sale or in advance.
3. Compare with other methods: Unlike the allowance method, the direct write-off method does not involve estimating bad debts or creating an allowance for doubtful accounts at the end of each period.
4. Consider the impact on financial statements: The direct write-off method may result in mismatched expenses and revenues, as bad debt expense is recognized in a different period than the related sales revenue.
5. Identify the correct statement: Based on the characteristics of the direct write-off method, the correct answer is that bad debts are recognized only when an account is determined to be uncollectible.