When a company has a policy of making sales for which credit is extended, it is reasonable to expect a portion of those sales to be uncollectible. As a result of this, a company must recognize bad debt expense. There are basically two methods of recognizing bad debt expense: (1) direct write-off method, and (2) allowance method.

Instructions

(a) Describe carefully both the direct write-off method and the allowance method of recognizing bad debt expense, give a numerical example with the journal entry for each method.

(b) Discuss the reasons why one of the above methods is preferable to the other and the reasons why the other method is not usually in accordance with IFRS.