Accounts receivable recurrent quantities due from customers when a business offers credit terms and sells to them on account.
You are watching: The use of the direct write-off method is allowed under the materiality constraint.
Inevitably some of the amounts due will certainly not be passist and the business will need to have actually a process in location to document these bad debts.
Journal Entry for the Direct Write-off Method
One approach of recording the negative debts is referred to as the straight write off approach which involves rerelocating the particular uncollectible amount from accounts receivable and also recording this as a bed debt cost in the revenue statement of the service.
Suppose a business identifies an amount of 200 due from a customer as irrecoverable as the customer is no longer trading. If the amount is not collectible, it demands to be removed from the customers accounts receivable account, and also this is completed with the adhering to straight write-off method journal entry.
|Bad debt expense||200|
In this instance, the credit enattempt removes the bad debt from accounts receivable and also reduces the amount due from the customer, and also the debit enattempt documents this as an expense in the earnings statement reducing the net earnings of the business.
The audit equation is as complies with.
Problems with the Direct Method
The direct write-off approach is simple to run as it only calls for that particular debts are created off with a straightforward journal as and when they are determined. The trouble yet, is that under primarily welcomed audit values (GAAP), the technique is not acceptable as it violates the equivalent principle. Using the direct write-off method revenue can be recorded in one period, once the customer is invoiced, whereas the expense of writing off the uncollectible amount is tape-recorded in a fully different period , as soon as the amount is established as irrecoverable.
As a result of this the direct write-off technique have the right to just be utilized when the debts written off are immaterial, when the matching idea deserve to be overridden by the materiality constraint.
Note: This is in comparison to the allowance strategy in which an estimate of the cost of the uncollectible receivable is videotaped in the very same period in which the revenue is recorded.
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Last modified March 13th, 2020 by Michael Brown
About the Author
Chartered accountant Michael Brvery own is the founder and CEO of Double Entry Bookkeeping. He has actually operated as an accountant and consultant for even more than 25 years and also has actually developed financial models for all forms of sectors. He has actually been the CFO or controller of both small and medium sized suppliers and has run little businesses of his own. He has been a manager and an auditor via Deloitte, a big 4 accounting firm, and also holds a degree from Loughborough University.
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March 13, 2020