Under the direct write-off method of uncollectible accounts, if a written-off account is later collected, the effect on the accounting equation is expected to be collected in the following period.
When a small business believes an invoice is uncollectible, they can instantly debit the Bad Debts Expense account and credit Accounts Receivable under the direct write-off technique. As a result, both the income that was recorded and the balance that was still owed to the company were removed from the books.
The generally accepted accounting standards, or GAAP, are broken by the direct write-off approach. According to GAAP, all costs associated with recorded revenue must be incurred during the same accounting period. Accounting Tools refers to this as the matching principle.
However, when a company decides an invoice won't be paid, the write-off method enables money to be expensed. This gives the impression that a business is more profitable than it actually is, at least in the short term.
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