How to Account for Bad Debts With the Direct Write-Off Method
The amount of a company’s accounts receivable is money that customers owe it for products or services purchased on credit. A bad debt is an outstanding account receivable that a customer is unable or unwilling to pay. Using the direct write-off method, you eliminate the amount of an account receivable from your total accounts receivable balance on the date you determine that a particular account will be uncollectible. This method can be used only when the uncollectible amount is immaterial or will have an insignificant effect on your company’s financial statements.
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Instructions
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Identify the date on which you determine that a specific account receivable will be uncollectible and identify its amount. For example, assume you determine on Feb. 1 that a $100 account receivable for your customer XYZ Company will be uncollectible.
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Write the date on which you determine the account to be uncollectible in the date column of a new journal entry in your accounting journal. In this example, write “02-01” in the date column.
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Write “Bad Debts Expense” in the account column on the first line of the journal entry. Write the amount of the uncollectible account in the debit column. This increases your bad debts expense account. For example, write “Bad Debts Expense” in the account column and “$100” in the debit column.
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Write “Accounts Receivable” with a left indent in the account column on the second line of the journal entry. Write the same amount of the bad debt in the credit column. This reduces your accounts receivable balance by the amount of the bad debt. In this example, write “Accounts Receivable” in the accounts column and “$100” in the credit column.
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Write a description of the journal entry in the accounts column on the third line of the entry. In this example, write “Record uncollectible account receivable from XYZ Company.”
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References
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