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There are two types of methods to write off bad accounts receivables1) Direct write-off and2) Creating a Provision/allowance
1. Direct Write-Off Method :- Under this method the amount which cannot be collected or which has become a bad debt is by passing the following entries.
a) Credit to Accounts Receivable
b) Debit to Bad Debt Expenses
The direct write off method is used mostly in the USA as the law of the land requires it to do so.
2. Creating a Provision : Under this method, the company anticipates that some of the accounts receivables or its sales on credit may not be uncollectable. Here the company debits bad debts expense and credits provision for doubtful debts. This provision account is a contra receivable account and it allows the company to report the net amount of the receivables that it expects will be turning to cash prior to identifying and removing a specific account receivable. When a specific customer's account does present itself as uncollectible, the customer's account will be written off by crediting Accounts Receivable and debiting Allowance for Doubtful Accounts.
The provision method is more in line with the accountants' concept of conservatism and may result in a better matching of the bad debt expense with the credit sales
Under the direct write-off method, receivables are written off only when they specifically go bad. The direct write-off method is not acceptable under U.S. GAAP because it is not consistent with accrual accounting since it does not match the revenues and expenses of the company.
When a business is unable to collect payment on goods and services that were sold on credit to its customers, it "writes off," or recognizes this loss on its books. The direct write-off of bad debt is a method commonly used by small businesses and companies that are not required to use generally accepted accounting principles, or GAAP, to maintain their books
I agree with Mr. Imran.......................................
Direct write-off method is one of the two most common accounting techniques of bad debts treatment. In the direct write-off 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 Expenseis DEBITED xxxxx
Accounts Receivable is CREDITED xxxxx
Direct write-off method does not use any allowance or reserve account.
Although the direct write-off 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 yearX1, bad debts will be realized in the beginning months of accounting yearX2. Thus the use of direct write-off 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, it not advised to use direct write-off method. Instead, the allowance method of bad debts treatment is preferred.
What ever the methods as mentioned above the action before it must be accepted and approved by GM & SM & CFO & COO as its decrease the sales of the company by the end of period and must have accepted reason in order being tracked why we reach up for any write off AR as its not accepted by any companies and must be investigate the reasons to void of repeat again and lose more blood from the company, finally I agree with Mr.Moataz Ali Sobhi Elsabawy.
