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Wize University Introduction to Financial Accounting Textbook > Receivables

Allowance for Doubtful Accounts

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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.


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


Extra Practice
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:
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: