Question

Direct Write-Off Method

Journalize the following transactions, using the direct write-off method of accounting for uncollectible receivables.

Oct. 2: Received $2,980 from Paula Spitler and wrote off the remainder owed of $3,550 as uncollectible. If an amount box does not require an entry, leave it blank.

Oct. 2

Dec. 20: Reinstated the account of Paula Spitler and received $3,550 cash in full payment.

Reinstate
Collection

Answer 1

Direct write-off method:

Date Account Titles and Explanation Debit Credit 2-Oct Cash $2,980 Bad Debts Expense $3,550 Accounts Receivable - Paula Spitler $6,530 (To record part payment received from Paula and write-off of remainder as uncollectible) 20-Dec Accounts Receivable - Paula Spitler $3,550 Bad Debts Expense $3,550 (To reinstate Paula Spitler's account) 20-Dec Cash $3,550 Accounts Receivable - Paula Spitler $3,550 (To record receipt of cash on previously written off amount as uncollectible)

Notes:

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 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.