October 30, 2016 admin

Allowance for Doubtful Receivables

Assets

ALLOWANCE FOR DOUBTFUL RECEIVABLES ASSET ACCOUNT
1290

ACCOUNT EXPLANATION
Allowance for loss from notes and accounts receivable that may be uncollectible.
TRANSACTIONS
  Jrnl. Dr. Cr.
  Monthly adjustment of allowance for doubtful notes and accounts SE
    Bad Debts 8700
      Allowance for Doubtful Receivable 1290
             
  Write-off of uncollectible P, S & B customer service G
    Allowance for Doubtful Receivable 1290
      Accounts Receivable—Parts, Service and Body Shop 1120
             
   Agency collection of account previously written off CR
    Cash in Bank—General 1001
    Professional & Service Fees 8660
      Allowance for Doubtful Receivables 1290
COMMENTS
  • There are two methods of accounting for loss from uncollectible receivables:
    1. The allowance method, utilizing Account 1290, recognizes the loss anticipated in the future from the uncollectibility of existing receivables. This estimated loss may be computed by applying a percentage, based on prior experience, to current credit sales or by estimating the anticipated loss based upon the age of the receivables. Actual write-offs of uncollectible accounts are charged to the allowance, and collections of amounts previously written off are credited to the allowance. This method is recommended because it facilitates control of costs and provides closer matching of expense with income.
    2. The direct write-off method does not recognize losses until specific receivables are determined to be uncollectible, at which time they are charged to Account 8700, Bad Debts, and credited to the receivable account. Under this method, Account 1290 is not used and collection of amounts previously written off should be credited to Account 8700.

    After a method has been selected, it should be used consistently. Tax counsel should be consulted before any change is made in the method of accounting for bad debts.

  • The balance in this account should be adjusted monthly to reflect the estimated loss from uncollectible notes and accounts receivable.
  • Write-off of uncollectible receivables should have prior approval of appropriate management.
  • Receivables written off as uncollectible should be transferred from the subsidiary ledger to a memorandum collection ledger for further collection effort.