Direct write-off method

Definition

The direct write-off method is an accounting technique used to record bad debts by writing off specific accounts receivable when they are deemed uncollectible. This method does not use an allowance for doubtful accounts, leading to potential mismatches between revenue and expenses.

5 Must Know Facts For Your Next Test

1. The direct write-off method records bad debt expense only when a specific account is deemed uncollectible.
2. It is not GAAP-compliant because it may violate the matching principle of accounting.
3. This method can result in fluctuating net income due to irregular timing of recognizing bad debts.
4. Direct write-off is simpler but less accurate compared to the allowance method.
5. It is more commonly used by small businesses with relatively insignificant amounts of receivables.

Review Questions

Related terms

Allowance Method:

An accounting technique that estimates and matches bad debt expenses to related revenue within the same period using an allowance for doubtful accounts.

Bad Debt Expense:

The cost reported on a company's income statement that represents receivables that are deemed uncollectible.

Accounts Receivable:

Money owed to a company by its customers for goods or services delivered on credit.