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debt and shareholders.docx

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Ryerson University
ACC 333
Douglas King

Bad Debts Direct Writeoff Method Direct writeoff method is one of the two most common accounting techniques of bad debts treatment In the direct writeoff method uncollectible accounts receivable are directly written off against income at the time when they are actually determined as bad debts When debt is determined as uncollectible a journal entry is passed in which bad debts expense account is debited and accounts receivable account is credited as shown below Bad Debts Expense Accounts Receivable Direct writeoff method does not use any allowance or reserve account Although the direct writeoff method is simple it has a major drawback Often it violates the matching principle of accounting because it recognizes bad debt expense which is partly related to previous accounting period For example if sales are made at the end of accounting year 20X1 bad debts will be realized in the beginning months of accounting year 20X2 Thus the use of direct writeoff method would cause deduction of expenses of previous period against revenue of current period which is contrary to the matching principle of accounting Since this method is not according to GAAP
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