Wize University Introduction to Financial Accounting Textbook > Receivables

Allowance for Doubtful Accounts

Allowance for Doubtful Accounts

Businesses that allow customers to have open accounts and purchase on credit must also account for the possibility of a customer not paying their balance.

Allowance Method

Contra-asset containing an estimate of the uncollectible receivables is called Allowance for doubtful accounts (AFDA).
Adjusting journal entry is required at the end of each period to adjust the AFDA balance, this is called Bad debt expense.

Transactions Affecting AFDA

Write-offs: Closing an account receivable that the company deems is definitely uncollectible.
Recoveries: Receiving payment for an account that was previously written-off.

Image illustrating Allowance for Doubtful Accounts

Net Accounts Receivable

The portion of accounts receivables that are expected to be collected
Also called Net realizable value of accounts receivables

Extra Practice

AFDA

During 2023, Glenn recorded bad debt expense of $5,000 and wrote off an uncollectible account receivable amounting to $3,000. Assuming a credit balance of $6,000 in the allowance for doubtful accounts at January 1, 2023, the balance in the allowance account at December 31, 2023 would equal:

Bad Debt Expense and AFDA

FCB Corporation began its fiscal year 2023 with a balance of $475,000 in the Trade Receivables account and a balance of $33,000 in the Allowance for Doubtful Accounts. During 2023, FCB had credit sales of $6,675,000.

Also during the year, the company wrote off $35,500 of accounts receivable that were deemed to be uncollectible, although one customer whose $4,000 account had been written off that same year surprised management by paying the amount in full in late September. The total cash collected throughout 2023 amounted to $6,568,500, which includes the surprise $4,000. FCB’s objective is to collect its receivables every 30 days (the industry’s average collection period is 32 days).

In preparation for the audited year-end financial statements, the controller prepared the following list of trade receivables at December 31, 2023, grouped by age: