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General Accounting Discussions: Write-off of account receivable

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    • CommentAuthorkinping
    • CommentTimeFeb 8th 2007
     
    anyone can tell me under what context or situation we need to write off a specific account receivable, in which we need to debit to allowance for uncollectible accounts and credit to accounts receivable. thx ~~
    Thankful People: kac7700
    • CommentAuthorkac7700
    • CommentTimeFeb 12th 2007
     
    It really depends on your business practices, and how large your a/r balances are. In our company, I use a one year general rule. If we have been unable to collect for one year, and I can document and prove we have made attempts to collect the debt, I will have my a/r clerk write the balance off if it is under $300. We also have a policy that if a customer pays over or short within $3 that we will write that small balance off to the bad debt account.

    If you are dealing with very large a/r balances, you may want to enlist the assistance of a qualified attorney, or sell off your a/r to a factoring or collection company.
    Thankful People: kinping
    • CommentAuthorkinping
    • CommentTimeFeb 16th 2007
     
    thx, kac7700. i know most of the companies set up a bad debt account. usually the company will estimate the amount of uncollected a/r and transfer the allowance to the bad debt account. but what if the company does not use up the allowance during the operating cycle? is the bad debt expense overstated under this specific circumstances?
    • CommentAuthorCounter
    • CommentTimeFeb 23rd 2007
     
    Hang in there while I think this through:

    The allowance account is a contra asset account to the asset account, Accounts Receivable. The balance in the allowance account is an estimate and will remain in the account (unless you make an entry to adjust it), since it is a balance sheet account---a permanent account. The account Bad Debt Expense is an income statement account---a temporary account. Its balance will be closed automatically at the end of the accounting year (after the year's financial statements are prepared). The amount in the account Bad Debt Expense is also an estimate.

    As mentioned, the balance in the allowance account will be carried forward to the next accounting period as the estimated amount needed for the accounts receivable. In the next period, the allowance account balance is reviewed and might be adjusted to a new estimated amount, based on the present accounts receivable. The amount of the adjustment goes to Bad Debt Expense. Since the adjustment and the balance are estimates, any adjustments will get reported on the current year financial statements. You don't go back to any previous year.

    Now to your question. Yes, the Bad Debt Expense will be overstated, but it wasn't an error. It was the best amount given the information available at the time. Accountants use estimates throughout the financial reports (depreciation is an estimate, accrued utilities is an estimate, etc.) In the next period, the company will again have to estimate the balance for the allowance account. It again will make its best estimate with the information available at the time the financial statements are prepared.
    Thankful People: kinping
    • CommentAuthorkinping
    • CommentTimeFeb 23rd 2007
     
    Thx, counter. Your answer really helps me to clear up my thinking on this. Since the balance in the Bad Debt Expense is an estimate, do accountants make adjustments to this account and bring the balance to a more actual value.
    • CommentAuthorlouiys
    • CommentTimeJun 21st 2007
     
    • CommentAuthorabril
    • CommentTimeJun 30th 2007
     
    im not counter but my answer is yes. you have to disclose it though on notes to f/s explaining why you change your estimate.

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