Definition: The direct write-off method is a way of recording the loss from receivables that are no longer collectible by removing the accounts receivable without attempting estimate a bad debt expense. In other words, when a receivable is considered uncollectable, the direct write off method fully expenses the receivable without using an allowance account.
Let’s take a look at an example. Assume Beth’s Bracelet shop sells handmade jewelry to the public. Beth has many regular customers who pay on account. One customer purchased a bracelet for $100 a year ago and Beth still hasn’t been able to collect the payment. After trying to contact the customer several times, Beth decides that she will never receive her $100 and decides to write off the balance on the account.
Using the direct write off method, Beth would simply debit the bad debt expense account for $100 and credit the accounts receivable account for the same amount. This effectively removes the receivable and records the loss Beth incurred from the non-creditworthy customer.
If Beth later receives the payment from the customer, she can reverse the write off journal entry by crediting bad debt and debiting accounts receivable. Beth can then record the receipt of the cash with a debit to cash and a credit to accounts receivable.
What Does Direct Write-Off Method?
As you can see, writing off an account should only be done if you are completely certain that the full account is uncollectable. The direct write-off method has other GAAP issues as well. For instance, the matching principle isn’t really followed because the loss from this account is recognized several periods after the income was actually earned. The materiality principle also addresses when to use this method. For example, writing off a large and material account immediately might not be proper.