Monique H. answered • 03/23/19
Enrolled Agent and Accountant with concise lectures
The accounts receivable (AR) balance is increased by debits and decreased by credits. Upon receiving cash payment From your client, the cash account is increased with a debit and the accounts receivable is decreased with a credit. Ideally, the entire accounts receivable balance is off-set by cash payments.
In the real world, some of that balance will be uncollectible and the income that was recorded upon increasing the account receivable (debit AR, credit income) needs to be reversed with entering the equivalent expense of the uncollectible amount (debit expense, credit AR). The goal is to reflect a collectible AR balance.
Direct write-off vs. Allowance for Bad Debt
When decreasing the AR balance (decreases to AR are made by credits) for amounts that are uncollectible, there are two methods that can be used, both of which include a debit to the “bad debt expense” account. You may directly record the credit to the AR account under the Direct Write-off method, or you may record the credit to an allowance account called a contra-asset account that gets presented on the balance sheet just beneath the AR account.
The credit balance in the allowance account is used up as debits get recorded to it when the amount of the receivable credit for cash received is higher than cash!
When recording any transaction, remember that debits = credits. Thus, if the receivable is $10, but you only receive $8, you’re left with $2 to record.
Direct Write-off
Dr. Cash $8.00
Dr. Bad Debt $2.00
Cr. AR $10.00
Allowance Method
Dr. Cash. $8.00
Dr. Allow. $2.00
Cr. AR $10.00
Under the allowance method, the bad debt was previously recorded as an estimate.
