Recording the write off of an uncollectible account là gì năm 2024

For a doubtful debt, create a reserve account (also known as a contra account) for accounts receivable that may eventually become bad debts, estimate the amount of accounts receivable that may become bad debts in any given period, and create a credit to enter the amount of your estimate in this reserve account, which is known as the allowance for doubtful accounts. The debit in the transaction is to the bad debt expense. When you eventually identify an actual bad debt, write it off (as described above for a bad debt) by debiting the allowance for doubtful accounts and crediting the accounts receivable account.

Example of a Bad Debt and Doubtful Debt

ABC International has $100,000 of accounts receivable, of which it estimates that $5,000 will eventually become bad debts. It therefore charges $5,000 to the bad debt expense (which appears in the income statement) and a credit to the allowance for doubtful accounts (which appears just below the accounts receivable line in the balance sheet). A month later, ABC knows that a $1,500 invoice is indeed a bad debt. It creates a credit memo for $1,500, which reduces the accounts receivable account by $1,500 and the allowance for doubtful accounts by $1,500. Thus, when ABC recognizes the actual bad debt, there is no impact on the income statement - only a reduction of the accounts receivable and allowance for doubtful accounts line items in the balance sheet (which offset each other).

Thus, a bad debt is a specifically-identified account receivable that will not be paid and so should be written off at once, while a doubtful debt is one that may become a bad debt in the future and for which it may be necessary to create an allowance for doubtful accounts.

Management must determine the accounting method a company will use to write-off bad debt. The direct write-off method is one common method used. In this method any receivables not collected and determined to be bad debt are written off the books as an expense in the period in which they are classified as bad debt. The criteria for determining when uncollected accounts are moved to bad debt expense is also determined by management. The criteria can be based on historical percentages, an overall percent of sales, industry averages or another means which the company uses to establish when to determine bad debt. Regardless of which guideline is followed, with the direct write-off method the bad debt is written off in the accounting period in which it is classified as bad debt.

Let's look at an example of the direct write-off method. Let's say a company sells $5,000 of raw metal to one of its customers on credit in May, part of the second quarter period. In October, it becomes obvious that the customer is only going to be able to pay $4,000, and the remaining $1,000 becomes bad debt. This is written off as an expense in the fourth quarter period.

However, companies can budget for bad debt expenses, which can cover some of the difference. Auditors will examine the methodology followed and how accurate the estimates are to the actuals in order to sign-off on the companies financials.

Under the allowance method, if a specific customer’s accounts receivable is identified as uncollectible, it is written off by removing the amount from Accounts Receivable. The entry to write off a bad account affects only balance sheet accounts: a debit to Allowance for Doubtful Accounts and a credit to Accounts Receivable. No expense or loss is reported on the income statement because this write-off is “covered” under the earlier adjusting entries for estimated bad debts expense.

Let’s illustrate the write-off with the following example. On June 3, a customer purchases $1,400 of goods on credit from Gem Merchandise Co. On August 24, that same customer informs Gem Merchandise Co. that it has filed for bankruptcy. The customer states that its bank has a lien on all of its assets. It also states that the liquidation value of those assets is less than the amount it owes the bank, and as a result Gem will receive nothing toward its $1,400 accounts receivable. After confirming this information, Gem concludes that it should remove, or write off, the customer’s account balance of $1,400.

Under the allowance method of recording credit losses, Gem’s entry to write off the customer’s account balance is as follows:

The two accounts affected by this entry contain this information:

Note that prior to the August 24 entry of $1,400 to write off the uncollectible amount, the net realizable value of the accounts receivables was $230,000 ($240,000 debit balance in Accounts Receivable and $10,000 credit balance in Allowance for Doubtful Accounts). After writing off the bad account on August 24, the net realizable value of the accounts receivable is still $230,000 ($238,600 debit balance in Accounts Receivable and $8,600 credit balance in Allowance for Doubtful Accounts).

The Bad Debts Expense remains at $10,000; it is not directly affected by the journal entry write-off. The bad debts expense recorded on June 30 and July 31 had anticipated a credit loss such as this. It would be double counting for Gem to record both an anticipated estimate of a credit loss and the actual credit loss.

Recovery of Account under Allowance Method

After a seller has written off an accounts receivable, it is possible that the seller is paid part or all of the account balance that was written off. Under the allowance method, if such a payment is received (whether directly from the customer or as a result of a court action) the seller will take the following two steps:

1. Reinstate the account that was written off by reversing the write-off entry. If we assume that the $1,400 written off on Aug 24 is collected on October 10, the reinstatement of the account looks like this:
   
2. Process the $1,400 received on October 10:
   

The seller’s accounting records now show that the account receivable was paid, making it more likely that the seller might do future business with this customer.

Bad Debts Expense as a Percent of Sales

Another way sellers apply the allowance method of recording bad debts expense is by using the percentage of credit sales approach. This approach automatically expenses a percentage of its credit sales based on past history.

For example, let’s assume that a company prepares weekly financial statements. Past experience indicates that 0.3% of its sales on credit will never be collected. Using the percentage of credit sales approach, this company automatically debits Bad Debts Expense and credits Allowance for Doubtful Accounts for 0.3% of each week’s credit sales. Let’s assume that in the current week this company sells $500,000 of goods on credit. It estimates its bad debts expense to be $1,500 (0.003 x $500,000) and records the following journal entry:

The percentage of credit sales approach focuses on the income statement and the matching principle. Sales revenues of $500,000 are immediately matched with $1,500 of bad debts expense. The balance in the account Allowance for Doubtful Accounts is ignored at the time of the weekly entries. However, at some later date, the balance in the allowance account must be reviewed and perhaps further adjusted, so that the balance sheet will report the correct net realizable value. If the seller is a new company, it might calculate its bad debts expense by using an industry average until it develops its own experience rate.