direct write-off method
Imagine you only admit a customer owes you nothing when you finally give up on them entirely — you cross their name off, sigh, and call the money gone. You don't try to guess ahead of time how many customers might let you down; you simply react when each specific one clearly never pays. That wait-and-see approach is the direct write-off method.
Under the direct write-off method, a company makes no estimate of future bad debts. Instead, when a particular account is judged uncollectible, it records bad debt expense and removes that specific receivable at that moment. If a 3,000 invoice to a customer who has gone bankrupt is deemed worthless in March, the company records 3,000 of bad debt expense in March and erases the 3,000 receivable. There is no allowance account at all — the loss is recognized only when a real, identified account dies.
The method is simple and is acceptable for tax purposes and for tiny businesses where bad debts are rare and immaterial. But it has two real flaws that keep it out of formal financial reporting. First, it violates the matching principle: the expense often lands in a later period than the sale that caused it, distorting both periods' profit. Second, it overstates receivables in the meantime, because no allowance reduces them to what is really collectible. For these reasons GAAP and IFRS generally require the allowance method instead, except when amounts are immaterial.
A small landscaper sells a 1,200 job in October but never sets up an allowance. In February the client vanishes and the debt is hopeless, so only then does the landscaper record 1,200 of bad debt expense — four months after the revenue, in a different period.
The loss is recorded only when a specific account dies — often in a later period than the sale.
It is allowed for income taxes and for immaterial amounts, but GAAP and IFRS reject it for financial statements because it breaks matching and overstates receivables.