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