The Internal Revenue Service permits companies to take a tax deduction for bad debts only after specific uncollectible accounts have been identified. Unless a company's uncollectible accounts represent an insignificant percentage of their sales, however, they may not use the direct write-off method for financial reporting purposes. Since several months may pass between the time that a sale occurs and the time that a company realizes that a customer's account is uncollectible, the matching principle, which requires that revenues and related expenses be matched in the same accounting period, would often be violated if the direct write-off method were used. Therefore, most companies use the direct write-off method on their tax returns but use the allowance method on financial statements. Allowance method. Under the allowance method, an adjustment is made at the end of each
This is the end of the preview.
access the rest of the document.