Direct Write Off Method
Under direct write off method a specific account is determined to be uncollectible, the loss is charged to Bad Debts expense. Bad debts expense will show only actual losses from uncollectible. Using the direct write off method, entries to record write-offs are often made in a period following sales rather than in the period in which the sales were made. Therefore, there is no matching of expenses with the revenue.
- Use of the direct write off method can reduce the usefulness of both the Income Statement and Balance Sheet
- Unless bad debt losses are insignificant, this method is not acceptable for financial reporting purposes
Example # 1:
Based on an analysis the bad debts expense adjustment for the year 2016 is Rs. 1,000 for Ali and Sons.