The direct write off method is used in accounting to charge customer’s liability as an expense if the account is determined as uncollectible. This method is more convenient to perform as it uses an actual amount of bad debt. The other commonly used alternative is an allowance method.
An account receivable specialist can write-off the expenses if the account is determined to be uncollectible. The account can become uncollectible after the specialist’s multiple attempts to reach a customer remains unsuccessful, and an outstanding balance turns into bad debt. In such cases, the write off allows charging bad debt to expanses.
The bad debt is accurate in terms of credit card sales, as many companies provide credits for their products for the costumer’s convenience. However, not all the customers pay the loan, and an outstanding debt becomes a bad debt when the attempts to collect the money fail.
There are two primary write-off methods for uncollectible accounts: the direct write-off and allowance method. The main difference is that the direct write-off method uses an actual uncollectible amount of bad debt, and the allowance method uses an estimated amount.
The formula for the direct write-off method is the following:
Therefore, the actual amount of the bad debt is divided by the total account receivable for a period and multiplied by 100.
The allowance method is an alternative to the direct write-off, and it is popular in the financial industry. As this method records an estimate of bad debt expenses, the company creates an allowance for doubtful accounts, which is known as a bad debt reverse.
As the direct write-off method affects net income, many companies rely on the allowance method as it reflects the more realistic net on the balance sheet. However, some companies use the direct write-off method as it is easier to perform as it is composed of two transactions.