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Direct Write-Off Method

For many small business's, especially those that make the majority of sales in cash, the amount of accounts receivables that become uncollectible is immaterial. As a result, these business's are not required to use the allowance method to value accounts receivable, which is used to better match bad debt expenses with revenues. The simpler alternative for these companies is the direct write-off method. Under the direct write-off method, when an account is determined to be uncollectible, it is simply written off as a bed debt expense at this time and no allowance account is used. 

For example, imagine a local dry cleaner that does pick up and drop off service when a customer puts down their credit card. One customers credit card payment is declined after delivery. The customer had a couple suits and ties dry cleaned, totalling $135. The dry cleaner would make an accounting entry as follows. 

Sometimes a business will collect on an account that was originally deemed uncollectible. For example, imagine a month later this customer walks back into the dry cleaner with his suits again, and the dry cleaner takes cash from him for this previous charge. The dry cleaner would correct the bad debt expese recognized by making the following reversing entry.

The uncollectible accounts recovered account is a revenue account. The business could also simply credit bad debt expense as well to reduce the balance of the bad debt expense account. 

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