Journal Entry for Writing off Uncollectible Account
Write off uncollectible accounts is the process of removing accounts receivable from the balance sheet as the company is unable to collect from customers due to various reasons.
Accounts receivable is the balance that company expects to collect from the customer in the near future. It happens when the company sells on credit to the customers. They allow the customer to consume the goods or services before making payment. It is the factor to increase sales as the customer does not have the cash to make immediate payments. However, not all accounts receivable will be collected as expected.
The company usually provide credit sale to the small entity that purchase the goods and resell them to the consumers. They expect the customer to collect cash from the consumer and make a payment back before the due date. But there are many factors that lead to the collectible of those accounts receivable. The customers are unable to pay back and they are not willing to pay back.
Due to such issues, the seller will classify the accounts receivable as uncollectible accounts and require to write off. It removes the accounts receivable from balance sheet to expenses on the income statement.
There are two methods in accounting that allow the company to write off such balance to income statement. It is included the direct write-off method and allowance method.
Direct write-off is the accounting method that directly reduces the accounts receivable balance to bad debt expense on income statement. The company only make journal entry when a specific receivable is considered uncollectable due to a specific reason.
The allowance method is the accounting method that provides the provision of overall accounts receivable base on the estimation. They estimate the amount which can be uncollectible and record bad debt expenses and allowance for the doubtful account which is the A/R contra account. It simply reduces the accounts receivable net balance. When any specific accounts receivable is uncollectible, the company will reverse accounts receivable and the contra account.
Journal Entry for Writing off Uncollectible Account
Direct Write-Off
As the name suggests, this method will directly remove accounts receivable to bad debt expenses. The journal entry is debiting bad debt expenses and credit accounts receivable.
| Account | Debit | Credit |
|---|---|---|
| Bad Debt Expense | $$$ | |
| Accounts Receivable | $$$ |
The transaction will remove accounts receivable from balance sheet as the company knows that the balance is uncollectible. Company has record expenses on income statement and it will reduce the company profit.
Allowance for doubtful account
In allowance for doubtful method, the company has to make two separate journal entries. The first entry is to record the bad debt expense and allowance for a doubtful account which is the contra account of accounts receivable.
| Account | Debit | Credit |
|---|---|---|
| Bad Debt Expense | $$$ | |
| Allowance for doubtful account | $$$ |
It will record bad debt expenses and reduce the net A/R by increasing the allowance for doubtful accounts. The recorded amount depends on the company estimation, they try to get the closed amount to actual bad debt.
When the actual bad debt incurs, the company will simply record the accounts receivable and its contra account. The journal entry is debiting allowance for doubtful and credit accounts receivable.
| Account | Debit | Credit |
|---|---|---|
| Allowance for doubtful account | $$$ | |
| Accounts receivable | $$$ |
This transaction will not impact anything, the accounts receivable net balance will remain the same. It has no impact on the bad debt expense as well.
Example
Company ABC is using the direct bad write-off method. During the month, they have realized that one customer was out of business, and they still own the company for $ 5,000. Please prepare a journal entry to write off an uncollectible account.
ABC has realized that the customer was bankrupt, so the receivable will be uncollectible. Based on the direct write-off method, they simply reverse the accounts receivable to the bad debt expense.
The journal entry is debiting bad debt expense $ 5,000 and credit accounts receivable $ 5,000.
| Account | Debit | Credit |
|---|---|---|
| Bad Debt Expense | 5,000 | |
| Accounts Receivable | 5,000 |