Direct Write-Off Method

The direct write-off method charges a receivable straight to bad debt expense at the moment it is judged uncollectible, with no allowance carried against receivables beforehand. Nothing is estimated in advance and no contra-asset account exists, so the gross receivable itself comes down and the expense lands in the period of the judgment rather than the period of the sale.

The Write-Off Entry, and the Recovery

Only one transaction produces an entry here. When a specific customer balance is judged uncollectible, debit bad debt expense and credit accounts receivable for the amount written off. No valuation account is touched, because the method never created one.

A later collection needs two entries rather than one. The write-off is reversed first, by debiting accounts receivable and crediting bad debt expense for the amount recovered, and the cash receipt is then recorded against the reinstated balance (OpenStax, Principles of Financial Accounting, section 9.2). Reinstating it first leaves the customer’s own account showing that the money arrived.

When a balance is judged uncollectible
  DR  Bad debt expense
      CR  Accounts receivable

When a written-off balance is later collected
  DR  Accounts receivable
      CR  Bad debt expense
  DR  Cash
      CR  Accounts receivable

Why the Books Do Not Run on It

At the reporting date an entity records an allowance for credit losses on the financial assets in the standard’s scope (FASB Accounting Standards Update 2016-13, paragraph 326-20-30-1), and a method that carries no allowance cannot meet that. It also reports the loss in a later period than the revenue that created the receivable, the timing separation worked through in bad debt expense.

Where the Charge-Off Still Counts on the Return

The federal deduction is not a book method. It attaches to a particular debt, and is allowed for any debt which becomes worthless within the taxable year (26 U.S.C. 166(a)(1)). Worthlessness is the condition, and how the business keeps its ledger is not.

Partial worthlessness is where the entry becomes load-bearing. Where the Secretary is satisfied that a debt is recoverable only in part, it may be allowed as a deduction in an amount not in excess of the part charged off within the taxable year (26 U.S.C. 166(a)(2)), and the regulation allows the worthless amount only to the extent charged off during the taxable year (26 CFR 1.166-3(a)(2)). So a partial write-off has to be on the books before the year closes.

A recovery runs back the other way. An amount attributable to the recovery of a bad debt allowed as a deduction in a prior taxable year is included in gross income for the year of recovery, except to the extent it is excluded under the rules on recovering items previously deducted (26 CFR 1.166-1(f)).

What It Is Confused With

Two separations sit under this term, and they are not the same one.

Against the allowance method, the difference is when the estimate happens. The allowance method sizes an expected loss at the reporting date and carries it in a valuation account against gross receivables, so a later write-off moves that account and never reaches income. Under the direct write-off method there is no such account for a write-off to move. The two entries the allowance method runs on are set out in allowance for doubtful accounts.

Against the tax charge-off, the difference is which question is being answered. Writing a balance off is a bookkeeping act the business times itself. Whether the debt has become worthless is a question of fact, and the entry does not settle it. A write-off log is not a bad debt schedule: what qualifies as a bad debt on the return, and what still counts only as a doubtful debt, are separate tests worked through in how to read an accounts receivable aging report.

Common Questions

Accountably places trained offshore accountants inside US CPA and EA firms, and a firm that wants to see the review standard on its own receivables work first can start with a trial task.