Accounting Demystified

Direct Method

The direct method provides the information that users really want, such as how much cash was paid by the customers and how much cash was spent on running the business. How would a company get the information about the amount of cash paid by customers? It cannot use sales, because in most circumstances sales are made on credit. It cannot use the credits to the Accounts receivable account, because there are many adjustments that flow through the credit side of Accounts receivable (sales discounts and sales returns, to name a few). In order to provide this information, the accounting system has to be designed with the ability to identify the amount of cash paid by customers, and accounting systems often are not designed that way.