JournaldrillAllowance method
The allowance method estimates uncollectible receivables at period end (Dr Bad Debt Expense / Cr Allowance for Doubtful Accounts), then writes off specific accounts against the allowance when they go bad (Dr Allowance / Cr Accounts Receivable). Receivables are shown net of the allowance, and the expense is matched to the period of the sale.
Syntax
Estimate: Dr Bad Debt Expense / Cr Allowance; Write-off: Dr Allowance / Cr Accounts Receivable; Recovery: reverse the write-off, then Dr Cash / Cr Accounts Receivable| Part | What it is |
|---|---|
Allowance for Doubtful Accounts | Contra-asset; Accounts Receivable minus the allowance equals net realizable value. |
Net realizable value of receivables | The amount of receivables expected to be collected. |
Direct write-off method | Expense recorded only when a specific account proves uncollectible; not GAAP unless immaterial. |
Examples
Dec 31: Dr Bad Debt Expense 3,000 / Cr Allowance for Doubtful Accounts 3,000Result: Receivables 100,000 less allowance 3,000 = net realizable value 97,000
Year-end estimate.
Mar 5: Dr Allowance for Doubtful Accounts 800 / Cr Accounts Receivable 800Result: Receivables 99,200, allowance 2,200, net realizable value still 97,000
A customer's 800 account is written off; no expense is recorded and net receivables do not change.
Jun 10: Dr Accounts Receivable 800 / Cr Allowance for Doubtful Accounts 800; Dr Cash 800 / Cr Accounts Receivable 800Result: Allowance restored by 800, cash up 800
The written-off customer pays after all; the account is reinstated and then collected.
Common mistakes
- Debiting Bad Debt Expense when a specific account is written off: under the allowance method the expense was already recorded through the estimate.
- Expecting net receivables to change on a write-off: the receivable and the allowance fall by the same amount, so the net figure stays the same.
- Recording a recovery as revenue: reinstate the account through the allowance and then record the collection normally.
Practice Allowance method
These drills check your answer on live data, free, no account needed.
- Bad debts: aging methodAn aging of Copperline Tools' receivables at year end shows that $9,450 of accounts are expected to be uncollectible. Before adjustment, Allowance for Doubtful Accounts has a credit balance of $2,100. Record the year-end adjustment.
- Writing off an accountBluewater Marine uses the allowance method. It learns that a customer, Reed Charters, has closed its business, and it writes off Reed's $1,275 account balance as uncollectible.
- Recovery: reinstating the accountLast year Pinecrest Furniture wrote off a $640 account owed by Dana Vale. Dana has now contacted the company and promised to pay the full amount. Record only the entry that reinstates Dana's account; the cash collection will be recorded separately.
Questions
Why is the allowance method preferred over the direct write-off method?
It matches the bad debt expense to the period of the sale and reports receivables at the amount expected to be collected, which the direct write-off method does not.
Can the allowance for doubtful accounts have a debit balance?
Temporarily yes, if write-offs during the year exceed the allowance. The year-end adjustment then brings it back to the required credit balance.
Related
- Bad debt expenseHow to estimate and record bad debt expense: Dr Bad Debt Expense, Cr Allowance for Doubtful Accounts. Percent of credit sales versus aging of receivables.
- Writing off a receivableHow to write off an uncollectible account: Dr Allowance for Doubtful Accounts, Cr Accounts Receivable (allowance method) or Dr Bad Debt Expense (direct).
- Sale on accountHow to record a sale on credit: debit Accounts Receivable, credit Sales or Service Revenue, plus the cost of goods sold entry and the later collection.
- Notes receivableHow to record a promissory note from a customer: Dr Notes Receivable, Cr Accounts Receivable; accrue interest income; collect at maturity; dishonored notes.