All 23 Collections & Bad Debts questions
More in Collections & Bad Debts
What is bad debt? What is a promise to pay and how is it tracked? What is a collection call and how should it be conducted? What is a statement of account and how does it aid collections? What is the allowance for doubtful accounts and how is it recorded? How do you record the recovery of a previously written-off account? What is the percentage-of-sales method for estimating bad debt? What is credit insurance and how does it protect receivables? How do you prioritize collections to maximize cash recovery? What is the collection effectiveness index (CEI) and why use it?
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Accounts Payable & Receivable › Collections & Bad Debts

What is the difference between the direct write-off method and the allowance method?

Intermediate

Answer

The direct write-off method expenses a bad debt only when a specific account is deemed uncollectible—simple but violates matching and isn't GAAP-compliant for material amounts. The allowance method estimates expected losses each period (matching them to related sales) via an allowance for doubtful accounts, and is required under GAAP/IFRS.
Allowance method:
  Estimate expense:  Dr Bad Debt Expense  Cr Allowance for Doubtful Accounts
  Write off later:   Dr Allowance         Cr Accounts Receivable
Real-world example The company uses the allowance method so bad-debt expense is matched to the period of the sales that generated the risk.

Common follow-ups: Why isn't direct write-off GAAP-compliant? | How does the allowance support matching?

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All 23 Collections & Bad Debts questions