Accounting Demystified

Bad Debts

What happens if a customer isn't going to pay? Suppose the customer goes bankrupt, or the account is three years old. There is no sense maintaining the balance, sending statements, and perhaps following up with telephone calls. Sooner or later the company has to realize that it is not going to get paid and remove the amount from Accounts receivable. There are two methods that can be used: the direct write-off method and the allowance method.

Direct Write-Off Method

The direct write-off method removes (writes off) a balance from the Accounts receivable account when the company determines that the likelihood of receiving payment has diminished to negligible proportions. With this method, when the company writes off an account, it can ...