When the allowance object code is used, the unit is anticipating that some accounts will be uncollectible in advance of knowing the specific amount.
Use: Use with approval from the Division of Financial Services only.Īllowance for Doubtful Accounts is a contra current asset object code associated with A/R.
Write off of uncollectable Accounts Receivable. The following entry should be done in accordance with your revenue and reporting cycles (recording the expense in the same reporting period as the revenue is earned), but at a minimum, annually.ĬR Allowance for Doubtful Accounts Object Code Units should consider using an allowance for doubtful accounts when they are regularly providing goods or services “on credit” and have experience with the collectability of those accounts. In addition, this accounting process prevents the large swings in operating results when uncollectible accounts are written off directly as bad debt expenses. The projected bad debt expense is properly matched against the related sale, thereby providing a more accurate view of revenue and expenses for a specific period of time. In accrual-basis accounting, recording the allowance for doubtful accounts at the same time as the sale improves the accuracy of financial reports. If actual experience differs, then management adjusts its estimation methodology to bring the reserve more into alignment with actual results. The allowance, sometimes called a bad debt reserve, represents management’s estimate of the amount of accounts receivable that will not be paid by customers. An allowance for doubtful accounts is considered a “contra asset,” because it reduces the amount of an asset, in this case the accounts receivable.
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