Question

Consider the following statement: The fewer the uncollectible accounts, the better. Can you think of instances where this might not be the case? Support your points with an example of why fewer uncollectible accounts may not be better for business.

Answer 1

When a specific customer's account is identified as uncollectible, the journal entry to write off the account is:

1. A credit to Accounts Receivable (to remove the amount that will not be collected)
2. A debit to Allowance for Doubtful Accounts (to reduce the Allowance balance that was previously established)

If your write-off exceeds the amount posted in theallowance account, you'll wind up with a negative allowance -- that is, a debit balance. To remedy this, you can enter an additional transaction to further debit bad debt expense and credit bad debtallowance.

When a company estimates that some of itsaccounts receivable are uncollectible, in effect it is saying some of its accounts receivable are not resources. ... For example, if a company with $50,000 of January credit sales estimates that 1.5% of such sales will not be collected, it would beaffected as follows.

Calculate the total credit sales by adding up all sales involving accounts receivable. Look at the final income statement from the previous year todetermine the amount of bad debts expense. This is the total accounts receivables written off asuncollectible. Divide the total bad debts expense by total credit sales.

The entry to write off a bad account affects only balance sheet accounts: a debit to Allowance for Doubtful Accountsand a credit to Accounts Receivable. No expense or loss is reported on the income statement because this write-off is "covered" under the earlier adjusting entries for estimated bad debts expense.

Example

ABC LTD sells goods to DEF LTD for $500 on credit. ABC LTD subsequently finds out that DEF LTD is being liquidated and therefore the prospects of recovering its dues are very low.ABC LTD should write off the receivable from DEF LTD in view of the circumstances. The double entry will be recorded as follows:

Debit	Bad Debt Expense	$500
Credit	DEF LTD (Receivable)	$500