Skip to content
Wikiaccounting
  • Small Business Tools
    • Accounting Software
    • QuickBooks
  • Audit
    • Audit Approaches
    • Assertions
    • Audit Committee
    • Audit Opinion
    • Audit Plan
    • Audit Procedures
    • Financial Statements
    • Audit Risks
    • Internal Audit
    • Audit Sampling
  • Financial Accounting
    • Account Receivable
    • Account Payable
    • Fixed Assets
    • Bank reconciliation
    • Factoring Account Receivable
    • Financial Planning
    • Forensic Accounting
    • Financial Ratios
      • Assets Turnover Ratio
    • Accounting Principle
    • Accounting Documents
    • Financial Statements
      • Balance Sheet
      • Current Assets
      • Equity
  • Small Business Tools
    • Accounting Software
    • QuickBooks
  • Audit
    • Audit Approaches
    • Assertions
    • Audit Committee
    • Audit Opinion
    • Audit Plan
    • Audit Procedures
    • Financial Statements
    • Audit Risks
    • Internal Audit
    • Audit Sampling
  • Financial Accounting
    • Account Receivable
    • Account Payable
    • Fixed Assets
    • Bank reconciliation
    • Factoring Account Receivable
    • Financial Planning
    • Forensic Accounting
    • Financial Ratios
      • Assets Turnover Ratio
    • Accounting Principle
    • Accounting Documents
    • Financial Statements
      • Balance Sheet
      • Current Assets
      • Equity
Wikiaccounting
Search
  • Small Business Tools
    • Accounting Software
    • QuickBooks
  • Audit
    • Audit Approaches
    • Assertions
    • Audit Committee
    • Audit Opinion
    • Audit Plan
    • Audit Procedures
    • Financial Statements
    • Audit Risks
    • Internal Audit
    • Audit Sampling
  • Financial Accounting
    • Account Receivable
    • Account Payable
    • Fixed Assets
    • Bank reconciliation
    • Factoring Account Receivable
    • Financial Planning
    • Forensic Accounting
    • Financial Ratios
      • Assets Turnover Ratio
    • Accounting Principle
    • Accounting Documents
    • Financial Statements
      • Balance Sheet
      • Current Assets
      • Equity

How to Write Off Accounts Receivable? Example and Journal Entries

Account Receivable

Accounts receivable is the amount owed to the entity by the customers that have bought goods from the entity on credit i.e. the sale has been made but the payment has not been received yet at the end of the accounting period. Month or year. Even though the payment is not collected, the entity still needs to recognize sale revenue and account receivable. The accounting entry to record accounts receivables is:

Accounts receivable     Dr

   Sales                                  Cr

When such sales are made, many customers end up defaulting on their payments, and this results in a loss for the company. This loss or expense is then written off from the accounts receivable account.

There are two ways of doing so. The two methods for writing off bad debts are referred to as:

  1. Direct-write off method
  2. Allowance method

Direct write-off:

In the direct write-off method, when after a few years of trying to recover the amount the invoice is declared as bad or uncollectible, it is directly written off or expensed out in the income statement by debiting bad debt expense and crediting accounts receivable.

The following journal entry is passed:

Bad debt expense      Dr

Account receivable           Cr

Example:

For example, Nate made sales of $9,000 to Serena on credit in 2017. After so many attempts of trying to recover the money by Nate in 2019, Serena filed for bankruptcy and was unable to pay back Nate. Since Nate could not collect the receivable from Serena, this $9,000 should be written off during 2019.

How is Nate supposed to go about this bad debt expense?

Related article  How to Record Sales Returns and Allowances? (Explanation and Journal Entries)

Nate should pass the following journal entry in his books to write off Serena from his accounts receivable:

Bad debt expense Dr       9,000

Accounts receivable Cr           9,000

$9,000 shall be reported as an operating expense in his income statement for the year ended 2019 and accounts receivable on his balance sheet shall be reduced by this amount.

Allowance method:

At the end of every accounting period, an estimate of doubtful debts is measured. Doubtful debts are those invoices against which sales have been made on credit but they are not expected to be turned into cash for various reasons.

For example, one of your customers may have faced a huge loss or is maybe facing liquidity issues or may have huge loans to pay off.

Any such customers might not be able to pay back the debt due to their deteriorating financial position.

Such debts are future losses and shall be expensed out immediately as per the prudence concept also known as the conservatism principle.

Since it is unknown to the company what amount each customer would default, the accounts receivable cannot be simply written-off. This is why a contra account is created known as the provision for doubtful debts or allowance for doubtful debts.

It is a credit account in nature because it is related to accounts receivable (asset). The provision account reduces the value of accounts receivable on the balance sheet to its net realizable value.

This means that the company reports the original amount the customers owe as accounts receivable. Still, those accounts receivable that are not expected to be turned into cash are reported under the provision for doubtful debts.

Related article  What are Other Receivables? Meaning, Formula, And Example

Accounting of bad debt expense:

The bad debt expense is recorded by passing the journal entry:

Bad debt expense Dr       xxx

      Provision for bad debt Cr         xxx

This provision, when actually turned into bad debt after several attempts of trying to recover the money is written-off from the accounts receivable account through the following journal entry:

Provision for bad debt Dr       xxx

Accounts Receivable Cr        xxx

Example:

ABC has a closing balance amounted to $20,000 in trade accounts receivable. At the start of the year, management decides to create a 2% provision for the bad debts.

At the end of the year, management decides to write off XYZ LTD’s debtor account balance as bad debt. The debit balance of the XYZ LTD account is $500.

Required: Pass the general Entries

Bad Debts A/C DR                                    $400

Provision for Bad Debts CR                               $400

and,

Bad Debts CR                                          $100

Provision for Bad Debts DR                 $400

          XYZ Receivable Account CR                              $500

Sinra

Post navigation
← Previous Post
Next Post →

Related Posts

How to Manage Accounts Receivable for Services Industry Company?

Account Receivable

What is Accounts Receivable Collection Period? (Definition, Formula, and Example)

Account Receivable, Financial Accounting

Accounts Receivable Turnover Ratio Analysis: Overview, Formula, And Analysis

Account Receivable, Financial Ratios

Are the Accounts Receivable Current or Non-assets?

Account Receivable, Q$A

Trending

  • Ultimate Guide to Get Boyd Gaming Pay Stubs and W2s For a Current and Former Employee
  • Ultimate Guide to Getting Boeing Pay Stubs and W2s For a Current and Former Employee
  • 10 Differences Between Internal Audit and External Audit You Should Know
  • Big Four Audit Firms: What Are They? And Why We Call Them Big 4
  • What is Auditing? (Definition, Purpose, Example, And More)
  • HOME
  • ABOUT US
  • POLICIES AND DISCLAIMER
  • CONTACT US
  • ADVERTISE

Copyright © 2023 Wikiaccounting