Allowance for Doubtful Accounts

Examples of Allowance for Doubtful Accounts in the following topics:

• Write-Offs

  • The portion of the account receivable that is estimated to be not collectible is set aside in a contra-asset account called Allowance for Doubtful Accounts.
  • The actual amount of uncollectible receivables is written off as an expense from Allowance for Doubtful Accounts.
  • It debits the Allowance for Doubtful Accounts.
  • The credit balance in Allowance for Doubtful Accounts before making this entry represented potential uncollectible accounts not yet specifically identified.
  • Allowance for uncollectible accounts 3,000 Cr. // 750 Dr. // 2,250 Cr.

• Dealing with Foreign Currency and Bad Debts

  • To deal with bad debts, companies have two methods available to them for measuring the net value of accounts receivable, which is generally computed by subtracting the balance of an allowance account from the accounts receivable account.
  • The first method is the allowance method, which establishes a contra-asset account, allowance for doubtful accounts, or bad debt provision, that has the effect of reducing the balance for accounts receivable.
  • The allowance for bad debt/doubtful accounts is a permanent account.
  • The amount of the bad debt provision can be computed in two ways: either by reviewing each individual debt and deciding whether it is doubtful (a specific provision), or by providing for a fixed percentage (e.g. 2%) of total debtors (a general provision).
  • Explain how the "gain or loss" account is used for foreign currency transactions and bad debts

• Recognizing Accounts Receivable

  • Since not all customer debts will be collected, businesses typically estimate the amount of and then record an allowance for doubtful accounts which appears on the balance sheet as a contra account that offsets total accounts receivable.
  • An example of how to calculate the allowance for doubtful accounts using the percentage of receivables method -- Assume Furniture Palace has an ending accounts receivable balance of USD 10,000 and estimates that 5% of receivables are doubtful.
  • To adjust the allowance account for the new estimate, debit Bad Debt Expense for USD 500 (10,000 *0.05) and credit Allowance for Doubtful Accounts for USD 500.
  • To calculate the allowance for doubtful accounts using the percentage of total sales, estimate the percentage of sales that will be uncollectible.
  • To adjust the allowance account for the new period's estimate, debit Bad Debt Expense for USD 2,000 (20,000 *0.10) and credit Allowance for Doubtful Accounts for USD 2,000.

• Valuing Notes Receivable

  • Companies have two methods available to them for measuring the net value of accounts receivable: the allowance method and the direct write-off method.
  • Companies have two methods available to them for measuring the net value of accounts receivable--the allowance method and the direct write-off method.
  • The first method is the allowance method, which establishes a contra-asset account, allowance for doubtful accounts, or bad debt provision, that has the effect of reducing the balance for accounts receivable.
  • by reviewing each individual debt and deciding whether it is doubtful (a specific provision)
  • It is simpler than the allowance method in that it allows for one simple entry to reduce accounts receivable to its net realizable value.

• Recognizing Notes Receivable

  • To record a journal entry for a sale on account, one must debit a receivable and credit a revenue account.
  • For example, a sale on account would be recorded similarly to the following interest receivable journal entry:
  • The ending balance on the trial balance sheet for accounts receivable is usually a debit.
  • The first method is the allowance method, which establishes a contra-asset account, allowance for doubtful accounts, or bad debt provision, that has the effect of reducing the balance for accounts receivable.
  • The two methods are not mutually exclusive, and some businesses will have a provision for doubtful debts, writing off specific debts that they know to be bad (for example, if the debtor has gone into liquidation. )

• Valuing Accounts Receivable

  • Companies use two methods to account for bad debts: the direct write-off method and the allowance method.
  • For tax purposes, companies must use the direct write-off method, under which bad debts are recognized only after the company is certain the debt will not be paid.
  • Smith fails to pay a $100 balance, for example, the company records the write-off by debiting bad debts expense and crediting accounts receivable from J.
  • Accounts receivable is a control account that must have the same balance as the combined balance of every individual account in the accounts receivable subsidiary ledger.
  • Since the specific customer accounts that will become uncollectible are not yet known when the adjusting entry is made, a contra-asset account named allowance for bad debts, which is sometimes called allowance for doubtful accounts, is subtracted from accounts receivable to show the net realizable value of accounts receivable on the balance sheet.

• Activities to Manage Receivables

  • It is one of a series of accounts dealing with the billing of a customer for goods and services that the customer has ordered.
  • To record a journal entry for a sale on account, one must debit a receivable and credit a revenue account.
  • The ending balance on the trial balance sheet for accounts receivable is usually a debit .
  • The first method is the allowance method, which establishes a contra-asset account, allowance for doubtful accounts, or bad debt provision, that has the effect of reducing the balance for accounts receivable.
  • The amount of the bad debt provision can be computed in two ways, either (1) by reviewing each individual debt and deciding whether it is doubtful (a specific provision) or (2) by providing for a fixed percentage (e.g. 2%) of total debtors (a general provision).

• Recording Sales

  • In bookkeeping, accounting, and finance, net sales are operating revenues earned by a company for selling its products or rendering its services.
  • Sales - Sales Return & Allowances - Sales Discount = Net sales
  • From an accounting standpoint, sales do not occur until the product is delivered.
  • In double-entry bookkeeping, a sale of merchandise is recorded in the general journal as a debit to cash or accounts receivable and a credit to the sales account.
  • Fees for services are recorded separately from sales of merchandise, but the bookkeeping transactions for recording sales of services are similar to those for recording sales of tangible goods.

• Defining Accounts Receivable

  • Companies have two methods available to them for measuring the net value of accounts receivable, which is generally computed by subtracting the balance of an allowance account from the accounts receivable account.
  • The first method is the allowance method, which establishes an allowance for doubtful accounts, or bad debt provision, that has the effect of reducing the balance for accounts receivable.
  • By reviewing each individual debt and deciding whether it is doubtful (a specific provision)
  • It is simpler than the allowance method in that it allows for one simple entry to reduce accounts receivable to its net realizable value.
  • This chart lays out methods for accruing revenue and expenses in accounting.

• Recording Purchases

  • In merchandising accounting, purchases are the amount of goods a company buys in the course of a year, including the kind, quality, quantity, and cost.
  • In accounting, purchases are the amount of goods a company buys over the course of the year.
  • Purchases are offset by Purchase Discounts, and also Purchase Returns and Allowances.
  • And if the payments are not made in time, an anti-revenue account named Purchase Discounts Lost is debited to record the loss.
  • The last distinction is important for determining liability for goods lost or damaged in transit from the seller to the buyer.