Which of the following best explains why not every purchase made on credit appears immediately on a company's account statement when using the direct write-off method for accounts receivable?

• A. Some purchases may later be deemed uncollectible and are only written off when determined to be uncollectible, not at the time of purchase.
• B. Purchases are only recorded if the customer pays in cash at the time of sale.
• C. The direct write-off method requires that all purchases be recorded as expenses, not as receivables.
• D. All purchases are immediately written off as bad debt, so none appear on the account statement.

Answer: (A)

Verified step by step guidance

1. Understand the direct write-off method: This method is used for accounting for uncollectible accounts. Under this method, bad debts are only recognized when they are determined to be uncollectible, rather than estimating bad debts in advance.
2. Analyze the timing of recognition: Purchases made on credit are initially recorded as accounts receivable. However, under the direct write-off method, these receivables are not immediately written off unless they are deemed uncollectible.
3. Consider the implications of uncollectible accounts: The direct write-off method does not anticipate bad debts at the time of sale. Instead, it waits until there is evidence that a specific account will not be collected before recording it as an expense.
4. Evaluate the incorrect options: The statement 'Purchases are only recorded if the customer pays in cash at the time of sale' is incorrect because credit sales are recorded as accounts receivable. The statement 'The direct write-off method requires that all purchases be recorded as expenses, not as receivables' is incorrect because receivables are recorded first, and only uncollectible amounts are expensed later. The statement 'All purchases are immediately written off as bad debt' is incorrect because only uncollectible accounts are written off, not all purchases.
5. Conclude with the correct explanation: The correct answer is that some purchases may later be deemed uncollectible and are only written off when determined to be uncollectible, not at the time of purchase. This aligns with the principles of the direct write-off method.