How do you record allowance for doubtful accounts on the balance sheet?
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An allowance for doubtful accounts is a contra account that nets against the total receivables presented on the balance sheet to reflect only the amounts expected to be paid. The allowance for doubtful accounts estimates the percentage of accounts receivable that are expected to be uncollectible. However, the actual payment behavior of customers may differ substantially from the estimate. Show
Key Takeaways
1:22 Allowance for Doubtful AccountsUnderstanding the Allowance for Doubtful AccountsRegardless of company policies and procedures for credit collections, the risk of the failure to receive payment is always present in a transaction utilizing credit. Thus, a company is required to realize this risk through the establishment of the allowance for doubtful accounts and offsetting bad debt expense. In accordance with the matching principle of accounting, this ensures that expenses related to the sale are recorded in the same accounting period as the revenue is earned. The allowance for doubtful accounts also helps companies more accurately estimate the actual value of their account receivables. Because the allowance for doubtful accounts is established in the same accounting period as the original sale, an entity does not know for certain which exact receivables will be paid and which will default. Therefore, generally accepted accounting principles (GAAP) dictate that the allowance must be established in the same accounting period as the sale, but can be based on an anticipated or estimated figure. The allowance can accumulate across accounting periods and may be adjusted based on the balance in the account. Recording the Allowance for Doubtful AccountsTwo primary methods exist for estimating the dollar amount of accounts receivables not expected to be collected. Percentage of Sales MethodThe sales method applies a flat percentage to the total dollar amount of sales for the period. For example, based on previous experience, a company may expect that 3% of net sales are not collectible. If the total net sales for the period is $100,000, the company establishes an allowance for doubtful accounts for $3,000 while simultaneously reporting $3,000 in bad debt expense. If the following accounting period results in net sales of $80,000, an additional $2,400 is reported in the allowance for doubtful accounts, and $2,400 is recorded in the second period in bad debt expense. The aggregate balance in the allowance for doubtful accounts after these two periods is $5,400. Accounts Receivable Aging MethodThe second method of estimating the allowance for doubtful accounts is the aging method. All outstanding accounts receivable are grouped by age, and specific percentages are applied to each group. The aggregate of all group results is the estimated uncollectible amount. For example, a company has $70,000 of accounts receivable less than 30 days outstanding and $30,000 of accounts receivable more than 30 days outstanding. Based on previous experience, 1% of accounts receivable less than 30 days old will be uncollectible, and 4% of those accounts receivable at least 30 days old will be uncollectible. Therefore, the company will report an allowance of $1,900 (($70,000 * 1%) + ($30,000 * 4%)). If the next accounting period results in an estimated allowance of $2,500 based on outstanding accounts receivable, only $600 ($2,500 - $1,900) will be the adjusting entry amount. Allowance for doubtful accounts falls under the contra assets section in the balance sheet, meaning it can either be zero or negative. So, when a company estimates they will have $15,000 in bad debt, they debit bad debt expense on the balance sheet and credit the allowance for doubtful accounts. This means if the net AR of the company is $200,000, the actual payment a business expects to receive is ($200,000 – $15,000 = $185,000)  Now, let’s say you want to write off $10,000 in bad debt for your business. In that case, the allowance for doubtful accounts will be debited, and accounts receivable will be credited. However, the net AR doesn’t get affected, and only the remaining allowance reduces from $15,000 to $5,000. In some scenarios, there is a chance that a customer is unable to pay, and their AR is written off as bad debt. But a few weeks or months later, they make the payment and clear their dues. In such cases, the business must first debit its AR account and credit its allowance for doubtful accounts. After this, cash will be debited, and AR will be credited. Where does allowance for doubtful accounts go on a classified balance sheet?Allowance for doubtful accounts falls under the contra assets section of a company's balance sheet. It is then added to their total AR to get the approximate dues they expect will be cleared by their customers.
How are doubtful debts shown on balance sheet?The allowance for doubtful accounts resides on the balance sheet as a contra asset. Meanwhile, any bad debts that are directly written off reduce the accounts receivable balance on the balance sheet.
What is the accounting entry to record the allowance for doubtful accounts?The journal entries for recording the uncollectible A/R are as follows: Bad Debt Expense → Debit. Allowance for Doubtful Accounts → Credit.
Are allowance for doubtful accounts a current asset?Allowance for Doubtful Accounts is a contra current asset account associated with Accounts Receivable. When the credit balance of the Allowance for Doubtful Accounts is subtracted from the debit balance in Accounts Receivable the result is known as the net realizable value of the Accounts Receivable.
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