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Recording Uncollectible Accounts

Businesses must account for uncollectible accounts by reporting the net accounts receivable on the balance sheet, reflecting expected collections. There are two methods for recording these accounts: the direct write-off method, which recognizes losses when accounts become uncollectible, and the allowance method, which estimates losses in the same period as the related revenue. The allowance method ensures that all losses are matched with income earned in that period, typically requiring an adjusting entry at year-end.

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10 views2 pages

Recording Uncollectible Accounts

Businesses must account for uncollectible accounts by reporting the net accounts receivable on the balance sheet, reflecting expected collections. There are two methods for recording these accounts: the direct write-off method, which recognizes losses when accounts become uncollectible, and the allowance method, which estimates losses in the same period as the related revenue. The allowance method ensures that all losses are matched with income earned in that period, typically requiring an adjusting entry at year-end.

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Recording Uncollectible Accounts

Businesses must expect to sustain some losses from uncollectible accounts and should therefore show
on the balance sheet the net amount of

accounts receivable, the amount expected to be collected, rather than the

gross amount. The difference between the gross and net amounts represents the estimated
uncollectible accounts, or bad debts. These expenses

are attributed to the year in which the sale is made, though they may be

realized at a later date.

There are two methods of recording uncollectible accounts, the direct write-off method and the
allowance method.

Direct Write-Off Method

In small businesses, losses that arise from uncollectible accounts are recognized in the accounts in the
period in which they become uncollectible.

Under this method, when an account is deemed uncollectible, it is written off the books by a debit to
the expense account, Bad Debt Expense,

and a credit to the individual customer’s account and to the controlling

account.

For example, if Bill Anderson’s $300 account receivable, dated May

15, 200X, was deemed uncollectible in January of 20XX, the entry in

20XX would be:

Bad Debt Expense 300

Accounts Receivable, Bill Anderson 300

Allowance Method

As stated before, one of the fundamentals of accounting is that revenue

be matched with expenses in the same year. Under the direct write-off

method example above, the loss was not recorded until


a year after the revenue had been recognized. The allowance method does not permit this. The income
statement for each period must include all losses and expenses related to the income earned in that
period. Therefore,

losses from uncollectible accounts should be deducted in

the year in which the sale is made. Since it is impossible to predict which

particular accounts will not be collected, an adjusting entry is made, usually at the end of the year.

For example, assume that in the first year of operation, a firm has es-

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