Intro Uncollectible Accounts

Accounts that are receivables but cannot be collected
often called Bad Debt

These represent a loss that impacts income.

Direct Write-Off Method

Not supported by GAAP - Violates the concept of the matching principle.

This method records bad debt only when an account is deemed uncollectible.

Not aligned with GAAP

Journal Entries Direct Write-Off

Accounts Receivable Removed Directly

Account Bad Debt Expense (classified as an expense DR normal balance)

When you determine a customer will not pay, you simply remove the receivable and expense it as bad debt.

Debit Bad Debt Expense
Credit Accounts Receivable

Allowance Method -GAAP

Estimates Uncollectible Accounts in Advance

This is compliant with GAAP because it matches expenses with revenues.
Account:
Allowance for Doubtful Accounts (contra Asset, reduces receivables CR NB) some companies call it Allowance for Uncollectible Accounts I will use these accounts interchangeably

ESTABLISHING ALLOWANCE:
Example: A company estimates 3% of 60,000 credit sales will not be collected.
Debit Bad Debt Expense $1,800
Credit Allowance for Doubtful Accounts

Allowance Method Write Off

Reduces Receivables and Reduces the Allowance you made for Doubtful Accounts

Example: Apex Company has a balance of $1,200 that a customer has had aging in receivables for over a year. The company decides this amount in uncollectible. What journal entry will they use if the company uses GAAP practices?
Debit Allowance for Uncollectible Accounts $1,200
Credit Accounts Receivable $1,200

Greenwave Enterprises wrote off a customer's $300 account using the Allowance Method. The customer makes a full payment of $300 this month. How should Greenwave Enterprises record the journal entry for the payment after the account was written off?

First: Reestablish the Receivable:
Debit Accounts Receivable $300

Credit Allowance for Doubtful Accounts $300

Next: Accept Payment
Debit Cash $500
Credit Accounts Receivable $500

Allowance Method

Elite Corp. wrote off a customer's $500 account as uncollectible last month. This month, the customer unexpectedly made a full payment of $500. How should Elite Corp. record the journal entry for the payment after the account was written off using the Direct Write-Off Method?

First: Reestablish the Receivable:
Debit Accounts Receivable $500
Credit Bad Debt Expense $500

Next: Accept Payment
Debit Cash $500
Credit Accounts Receivable $500

Write-Off Method

What if they PAY?
(after you wrote them off)

Allowance Method:

~Bad Debt Expense (Expense account): Debit (NB)

~Allowance for Doubtful Accounts (Contra-asset): Credit (NB)

~Accounts Receivable (Asset account): Debit (Normal Balance)

~Cash (Asset account): Debit (Normal Balance)

Summary: Under the Allowance Method, bad debt is estimated and recognized as an expense in the period in which the sales occur. The Allowance for Doubtful Accounts is used to offset the Accounts Receivable. When an account is written off, the Allowance for Doubtful Accounts is debited, and when a payment is received on a written-off account, the Allowance for Doubtful Accounts is credited.e $500

Allowance Method

Bad Debt Expense (Expense account): Debit (Normal Balance)

• Accounts Receivable (Asset account): Debit (NB)

• Cash (Asset account): Debit (NB)

• Bad Debt Expense (Expense): Debit(NB)

Summary: Under the Direct Write-Off Method, bad debt is recognized only when a specific account is determined to be uncollectible. The write-off is recorded directly to Bad Debt Expense at the time of the uncollectible account determination.

Write-Off Method

Summary of Accounts for Both Methods