Question

Owens Company uses the direct write-off method of accounting for uncollectible accounts receivable. On December 6, Year 1, Owens sold $6,300 of merchandise to the Valley Company. On August 8, Year 2, after numerous attempts to collect the account, Owens determined that the account of the Valley Company was uncollectible.

a. Prepare the journal entry required to record the transactions on August 8.

b. Assuming that the $6,300 is material, explain how the direct write-off method violates the expense recognition (matching) principle in this case.

Answer 1

solution :

given that
owens company uses the direct write off method of accounting for uncollectible accounts receivable
also given that
on dec 6 , year 1 owens sold $6300 of merchandise to the valley company
on aug 8 , year 2 after numerous attempts to collect the money

a. Preparing the journal entry required to record the transactions on August 8 :
Debit to a bad debt expense account 6,300

Credit to the accounts receivable account. 6,300

Bad Debts of owens Company being uncollectable now written off
b.
This direct method of write off uncollectables violates the matching principle. The matching principle says

that revenue and costs should be matched in a particular accounting period. The costs should not be overburdened with previous period expenses. In this case this is baddebt of year 1 actd in year 2 . So the matching principle is violated.