Direct Write-Off Method
An accounting method that recognizes bad debt expense only when a specific receivable is confirmed to be uncollectible.
What is Direct Write-Off Method?
The direct write-off method records bad debt expense by debiting bad debt expense and crediting accounts receivable directly when a specific customer account is identified as uncollectible — no estimate is made in advance. While simple to apply, the method violates GAAP's matching principle because the expense is recognized in a later period than the revenue it offsets, distorting financial statements. For this reason, GAAP requires most companies to use the allowance method instead. The direct write-off method is, however, acceptable for US income tax purposes under the specific charge-off method for business bad debts. It is also permitted under GAAP for companies with immaterial bad debt amounts.
Example
A small business sold $5,000 of goods on credit in March. In September, after multiple collection attempts, the owner determines the customer will not pay. Under the direct write-off method, $5,000 of bad debt expense is recorded in September — six months after the related revenue — violating the matching principle.