The Direct Write-off Method of Accounts Receivable & Tax Purposes

The direct write-off of accounts receivable is primarily used by small companies for financial reporting, but is required by all companies in determining their tax obligation to the Internal Revenue Service. Using this method, a company records the bad debt to its general ledger once it's determined uncollectible. This differs from the allowance method, which requires a company to estimate potential losses before they even occur.

Direct Write-off Method Explained

When a customer fails to pay the amounts he owes, the sale may be "written off" a company's books -- removed from accounts receivable and recorded as a loss to the company. "Accounts receivable" is a general ledger account found on a company's balance sheet. The balance represents the total amounts of credit sales that were invoiced to the company's customers and are now awaiting cash receipt.

Direct Write-off Example

The journal entry to use the direct write-off method of bad debt requires two general ledger accounts -- accounts receivable and bad debt expense. To understand the impact to the general ledger, let's first begin with the point of initial sale. Assume that on July 31, a corporation has an outstanding accounts receivable balance of $148,000.