Question

Under the direct write-off method, the account credited when an account is determined to be uncollectible is

		Bad Debt Expense
		Sales;
		Allowance for Bad Debts
		Accounts Receivable

Answer 1

Direct write–off method aims to record a debt determined as uncollectible against income. This method is simple to use and does not use any allowance. The journal entry is simply but the method is not popular as the same does not follow the matching principle of accounting in the sense that the bad debts relating to a previous financial year are written off against income of the period in which they are determined as uncollectible.

The journal entry to record bad debts expense is as follows,

Bad Debts Expense    Debit Amount

Accounts Receivable              Credit Amount

Under this method, the expense is not reported in the income statement, as the entry affects only the Accounts Receivable (balance sheet item). When a firm identifies that a particular customer’s accounts receivable is uncollectible, the firm writes off the uncollectible by deducting the amount from Accounts Receivable.

The direct write-off method is not much used as this is not in accordance with GAAP principles, instead the allowance method of treating bad debts is a preferred method.

In situations, where payment is received against amounts previously written off as bad debts, the customer account is reinstated to record the receipt of the payment. Also, the bad debt expense is reduced when a payment, which is considered uncollectible is received on a future date.