In short
Under the direct write-off method, bad debt expense is recorded only when a specific account is determined to be uncollectible. It isn't acceptable under generally accepted accounting principles unless the effect is immaterial.
Key takeaways
- It doesn't match bad debts with the revenue of the period and overstates receivables.
- It is the method required for federal income tax purposes, creating a temporary difference.
- The allowance method, using expected credit losses, is required for financial reporting.
Where it's tested
FAR: Cash, Receivables & Bad Debts — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
A company writes off a specific $8,000 account as uncollectible using the allowance method. What is the effect on total assets and net income?