 Hello and welcome to this session. This is Professor Farhad in this session. We would look at the direct write-off method This topic is covered in introductory accounting course As well as the CPA exam as always I would like to remind you to connect with me on LinkedIn if you haven't done so YouTube is where you would need to subscribe. I have 1600 plus accounting or I think finance and tax lectures This is a list of all the courses that I covered including many CPA Questions if you like my lectures, please like them click on the like button It doesn't cost you anything share them put them in playlist if these videos are benefiting you It means they might benefit other people Especially these days with the corona virus out there many students are relying on online Education and please connect with me on Instagram on my website for head lectures calm You will find supplementary information Especially if you're studying for your CPA exam or if you would like to supplement your accounting education So let's talk about the direct write-off method. What is the big idea here? Well, the idea is this When we sell on credit when we sell and we allow the customer to pay So let's assume we make a sale of $10,000 and we ask the client to pay us later We didn't ask them. We offered them to pay later. So here's what's gonna happen. We're gonna have an account receivable For $10,000 And we're gonna have a sale for $10,000 as well now A fact of life that some customers some customers may not pay their bill For many reasons now for you as an individual you should always pay your bill. Otherwise, your credit will be Negatively affected but the point is some customers may not pay some businesses may not pay because simply they don't have the money They they simply they cannot afford it. They're filing for a bankruptcy. There's a dispute. It doesn't matter The point is they're not gonna pay this account receivable So this account receivable cannot stay on the books as an asset because now it's misleading You're saying you have an asset of $10,000 in reality. This asset is worthless. Why is it worthless? because You don't expect to be paid. So what you need to do you need to write off the account you need to remove the account so one way to Write off the account is using what we call the direct write-off method the direct write-off method So simply put some customers may not pay their account Incollectible are referred to as bad debt. So this account receivable here of $10,000 Will be referred to what it's gonna be transferred not referred to it's gonna be transferred into an expense called bed debt expense There are two method to do this There are two method to account for bed debt. There is the direct write-off method method one and the allowance method is method two So I'm gonna tell you right now in this session. I'm only gonna cover the direct write-off. Although the direct write-off is not a Gap method. So it's not an acceptable method for gap The allowance method is a gap method. This method is the gap method But it doesn't matter for now. We need to learn both. We need to learn both So, how does the direct write-off method work pretty straightforward, let's walk Let's what let me walk you through an example. It's pretty simple pretty straightforward and easy to use Let's assume we sold that comes old $520 worth of goods to Jay Kent on August 1st year one simply put we debit account receivable Jay Kent 520 we credit sales 520 now we sit and we wait until Jay Kent pays us the $520 August August went by Jay Kent did not pay September went by Jay Kent did not pay so we kept sending notification to Jay Kent to pay But Jay Kent is not paying their bill. So what's gonna happen then? After after a period of time depending the company might have a six-month period a year two years Whatever whatever period they have at some point they will give up in other words They would say we don't think that Jay Kent is Is going to pay us so simply they will give up once they give up once they decide that they're gonna give up They're gonna have to write off this account. So this account has to be gone. This account is no longer a Valid account receivable. So what do we do when we write off an account under the direct write-off method? I'm being very specific. This is the direct write-off method We credit this account to remove it and we debit an expense called bet that expense by doing so We wrote off. We wrote off the Jay Kent account receivable We wrote it off wrote it off means we turn the account receivable into an expense. That's what we did So this is the concept of a write-off. This is the concept of a write-off So when did we do so? When did we do so is when we decided? We tech com decided that I don't think we're gonna give up. I don't think we're gonna be collecting the money from Jay Kent. Okay Also notice that the customer specifically is identified. We identified Jay Kent So when we remove the receivable we specifically identified Jay Kent notice that the specific customer is noted in the transaction So we can make the proper entry in the customer account receivable subsidiary ledger So we remove them from the subsidiary ledger Now let's assume remember we wrote them off. Let's assume somehow Jay Kent Decided to pay their bill. Let's assume on March 1st You know like we wrote off the account in January almost 50 days later They were able to make a full payment. What do we have to do if the previously written off account is now paid? Well, we have to make two Entries we have to make two entries the first entry is to reverse what we did on January 22nd Simply put we have to put back the account receivable on the books So we have to debit account receivable credit bet that expense to remove the to eliminate this entry basically those two entries Eliminate each other now what we do is we debit cash and we credit account receivable now We debit cash and we credit account receivable for five hundred and twenty dollars and the direct write-off method Why is the direct write-off method is not a gap method because this is what I told you at the beginning I told you this is not a gap method There are there are reasons why it's not a gap method and hopefully you kind of notice why it's not kept a gap method As I was doing the problem. Otherwise, let me tell you why the expense recognition principle is not followed What is the expense recognition principle the expense recognition principle require that expenses be reported in the same accounting period as The sale they help produce if you remember in Jay Kent the sale took place in August and the expense took place in January We're gonna be assuming this is year one and this is year two so we made the sale in August for Jay Kent for five hundred and $20 and the expense when we wrote off the account was in year two This is a violation of the expense or matching principle because the sale took place in one year The expense took place in a separate year. So this is one of the weaknesses major weaknesses of the direct write-off method now The materiality constraint permit direct write-off method if the result are similar to the allowance Now, we don't know what the allowance method is but simply put if the direct write-off and the allowance method gives you the same Answer the same number then you can use the direct write-off method. So simply put The direct write-off method usually does not best match sales With expenses, that's the problem with the direct write-off method. So who uses the direct write-off method? Well, I'm gonna tell you when do you use it for tax purposes? You would use the direct write-off method also small businesses uses the direct write-off method businesses that have low or no No write-offs. They would they would use the direct write-off method in the next session What we're gonna do we're gonna be looking at the allowance method the allowance method is the gap method now If you like this lecture, please click on the like button share it subscribe and if you're looking for additional Material study for your CPA exam or supplement your accounting education Please visit my website for head lectures calm. Please stay safe these days. Good luck and study hard