1. 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 two basic approaches to recognizing bad debt expense: (1) direct write-off method and (2) allowance method.

Required:

1. Describe fully both the direct write-off method and the allowance method of recognizing bad debt expense.
2. Which method is required by GAAP and why?