Direct Write Off Method

Previously, we studied about, “Allowance Method for Uncollectible Accounts”, but, here we will concentrate on this important topic of Accounting i.e., Direct Write Off Method where we sold goods to our customer on Credit Basis and does not make provision or create an estimation or Allowance for Uncollectible Accounts.

Under this method, the company does not make Adjusting Entry for allowance for doubtful Accounts at the end of Current Accounting Period. When it is sure that the company can not collect its collectibles or in other words Uncollectible Accounts Expense become Actual Bad Debts, then the company recognizes such Loss to their Financial Statements as Bad Debts Written Off and pass following Accounting Journal Entry in its Journal:

Direct Write off Method Journal Entry                       

                        Uncollectible Accounts Expense a/c       XXX

                                                                               Accounts Receivable a/c    XXX

(Bad Debts Written Off For Goods Sold To Customers)

As the company violates or does not follow Matching Principle Gaap i.e., not matching sales with Uncollectible Accounts Expense during the Current Accounting Cycle, which is also the requirement of Generally Accepted Accounting Principles (GAAP) so it fails to show Accounts Receivable on Balance Sheet at Net Realizable Value (Accounts Receivable - Allowance For Doubtful Accounts). Also, Financial Statements does not show true and fair view and Reliable Position of Accounts Receivable to the Users of Financial Statements. So, this approach is suitable for Cash Basis of Accounting where lots of Business Transactions occurred on Cash Basis as in case of Professional Bodies and Consulting Agencies.