Direct Write-Off Method for Uncollectible Accounts

Under the direct write-off method, Bad Debt Expense is not recorded until the cus­tomer’s account is determined to be worthless. At that time, the customer’s account receivable is written off.

To illustrate, assume that on May 10 a $4,200 account receivable from D. L. Ross has been determined to be uncollectible. The entry to write off the account is as follows:

An account receivable that has been written off may be collected later. In such cases, the account is reinstated by an entry that reverses the write-off entry. The cash received in payment is then recorded as a receipt on account.

To illustrate, assume that the D. L. Ross account of $4,200 written off on May 10 is later collected on November 21. The reinstatement and receipt of cash is recorded as follows:

The direct write-off method is used by businesses that sell most of their goods or services for cash or through the acceptance of MasterCard or VISA, which are re­corded as cash sales. In such cases, receivables are a small part of the current assets and any bad debt expense is small. Examples of such businesses are a restaurant, a convenience store, and a small retail store.

Source: Warren Carl S., Reeve James M., Duchac Jonathan (2013), Corporate Financial Accounting, South-Western College Pub; 12th edition.

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