What is the Difference Between the Direct Write-off Method and the Allowance Method?

The main difference between the Direct Write-off Method and the Allowance Method in accounting for bad debt is the timing of when bad debt expense is recorded.

Under the Direct Write-off Method, bad debts are written off at the time a debt is determined to be uncollectible.

For example, a business receives notification of a customer’s bankruptcy. Under the Allowance Method, potential bad debts are estimated monthly based on current month’s sales or current month’s outstanding Accounts Receivable.

The Allowance Method complies with the Generally Accepted Accounting Principle of matching revenues with related expenses.

For more information about how to account for bad debts, watch this video:

Video explaining bad debts and allowance for doubtful accounts.

For a complete guide to Bad Debts and Allowance for Doubtful Accounts, check out this Accounting Student Guide:

  • What is Equity in Accounting and Finance?

    In Accounting and Finance, Equity represents the value of the shareholders’ or business owner’s stake in the business. Equity accounts have a normal credit balance. Equity increases on the credit

    Read more!

  • Understanding Financial Statements | Accounting Student Guide

    What is a Financial Statement? Financial Statements are a set of reports summarizing the activities of a business or organization. Much like a series of x-rays shows different views of

    Read more!

  • What is Treasury Stock?

    Treasury Stock represents a corporation’s stocks that were previously issued and sold to shareholders. The corporation reacquires the stock by purchasing the stock from shareholders. Treasury Stock reduces the number

    Read more!

  • What is Stockholders’ Equity?

    Stockholders’ Equity is the difference between what a corporation owns (Assets) and what a corporation owes (Liabilities). Stockholders’ Equity is made up of Contributed Capital and Earned Capital. Contributed Capital

    Read more!

  • What is Paid in Capital?

    What is Contributed or Paid-in Capital? Contributed Capital is also called Paid-in Capital. It includes any amounts “contributed” or “paid in” by investors or stockholders through purchasing of stocks or

    Read more!

  • What is the Difference Between Debt Financing and Equity Financing?

    When businesses needs funds to expand or grow the business, that capital can come from three sources: Funds from profits Funds from debt Funds from equity Funding business growth from

    Read more!

Caroline Grimm

Caroline Grimm is an accounting educator and a small business enthusiast. She holds Masters and Bachelor degrees in Business Administration. She is the author of 13 books and the creator of Accounting How To YouTube channel and blog. For more information visit: https://accountinghowto.com/about/

Recent Posts