Bad Debts Direct Write-off Method

Direct write-off method of accounting for bad debts is one of the simplest approaches to record bad debts. Bad debts are receivables that are not recoverable. In the direct write-off method, bad debts are directly written off against income at the time when they are actually determined as no longer recoverable.

Journal Entry

When debt is determined as irrecoverable, a journal entry is passed, in which bad debts expense account is debited and accounts receivable account is credited as shown below.

Bad Debts Expense$ XYZ
Accounts Receivable$ XYZ

Direct write-off method does not use any allowance or reserve account.

Drawback

Although the direct write-off method is simple, it has a major drawback, which is that it violates the matching principle of accounting because it recognizes bad debt expense which is partly related to previous accounting period. For example if sales are made at the end of accounting year 20X1, bad debts will be realized in the beginning months of accounting year 20X2. Thus the use of direct write-off method would cause deduction of expenses of previous period against revenue of current period which is contrary to the matching principle of accounting. Therefore, it not advised to use direct write-off method other than for very small businesses. Instead, the allowance method of bad debts treatment is preferred.

by Irfanullah Jan, ACCA and last modified on

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