Recording Uncollectible Accounts Expense and Bad Debts

uncollectible accounts expense journal entry

She has experience teaching math to middle school students as well as teaching accounting at the college level. She has a combined total of twelve years of experience uncollectible accounts expense journal entry working in the accounting and finance fields. For instance, let’s say you wrote off an account earlier in the year, but then the company paid unexpectedly.

Because the allowance went relatively unchanged at $1.1 billion in both 2020 and 2021, the entry to bad debt expense would not have been material. However, the jump from $718 million in 2019 to $1.1 billion in 2022 would have resulted in a roughly $400 million bad debt expense to reconcile the allowance to its new estimate. The major problem with the direct write-off is the unpredictability of when the expense may occur. Consider a company that has a single customer that has a material amount of pending accounts receivable. Under the direct write-off method, 100% of the expense would be recognized not only during a period that can’t be predicted but also not during the period of the sale. The direct write-off method records the exact amount of uncollectible accounts as they are specifically identified.

Is allowance for doubtful accounts a temporary account?

Know that bad debt expenses must be anticipated and recorded in the same period as the related sales revenue to conform to the matching principle. This journal entry takes into account a debit balance of $2000 and adds the prior period’s balance to the estimated balance of $4608 in the current period, providing for a bad debt of $6608 ($4608+2000). Delays recognition of bad debt until the specific customer accounts receivable is identified. Once this account is identified as uncollectible, the business will record a reduction to the customer’s accounts receivable and an increase to bad debt expense for the exact amount uncollectible.

What is the journal entry for uncollectible accounts?

To “write off” an account under this method we use the following journal entry: DR: Bad Debt Expense (for the amount uncollectible). CR: Accounts Receivable (for the amount uncollectible). This journal entry gets rid of the expectation that we will receive these funds and records this amount as an expense.

This is done to be in compliance with the matching principle which requires that revenues be matched to their related expenses within an accounting period. When this bad debt is written off, the allowance for doubtful accounts is credited by the write-off amount. If, however, a company uses the direct write-off method, it will credit accounts receivable to write off the bad debt. Because the time difference between the sale and the time a company realizes an account is uncollectible is usually long, using the direct write-off method will violate the matching principle. When an account is officially considered noncollectible , the business must make one of two entries.

Understanding uncollectible accounts

Record the journal entry by debiting bad debt expense and crediting allowance for doubtful accounts. The reason why this contra account is important is that it exerts no effect on the income statement accounts. It means, under this method, bad debt expense does not necessarily serve as a direct loss that goes against revenues. This is because if you wait to record the bad-debt expense in the year following the sale, you would be violating the matching principle. Hence, in order to adhere to the matching principle, the allowance method is used wherein the uncollectible account expense for the period is matched against the sales for that period. This means that you have to estimate the uncollectible account expense in the period of the sale.

  • The balance in the allowance for doubtful accounts prior to this entry was a credit of $100.
  • Accounts ReceivablesAccounts receivables is the money owed to a business by clients for which the business has given services or delivered a product but has not yet collected payment.
  • While the direct write-off method records the exact amount of uncollectible debts and can be used to write off small amounts, it fails to uphold the GAAP principles and the matching principle used in accrual accounting.
  • The statistical calculations can utilize historical data from the business as well as from the industry as a whole.
  • Note that under the allowance method the write-off did not affect an income statement account.

Are uncollectible accounts expenses debited or credited?

¨ Credit losses are debited to Bad Debt Expense (or Uncollectible Accounts Expense). ¨ Two methods are used in accounting for uncollectible accounts: (1) the Direct Write-off Method and (2) the Allowance Method. § When a specific account is determined to be uncollectible, the loss is charged to Bad Debt Expense.

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