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. The direct write-off method delays recognition of bad debt until the specific customer accounts receivable is identified. There are two methods a business may use to recognise bad debt: (1) the direct write-off method and (2) the allowance method. When the expense is recognised depends on the method of accounting for uncollectible accounts. When future collection of receivables cannot be reasonably assumed, recognising this potential nonpayment is required. Bad debt negatively affects accounts receivable. Because uncollectible accounts are a normal part of any business, bad debt expense is considered an operating expense. An uncollectible account is written-off (the asset is removed) and an expense is recognised. Uncollectible accounts, which is more commonly known as bad debt expense, is included in the calculation of profits (or losses). But at what amount? The amount owed by a customer? Not always! Although each customer must satisfy a business’ credit requirements before a credit sale is approved, inevitably some accounts receivable will not be collected – the customer defaults and never pays the account – known as uncollectible receivable or uncollectible accounts. Rina Dhillon Mitchell Franklin Patty Graybeal and Dixon CooperĪs stated in the previous section, accounts receivable are reported on the balance sheet as an asset. 5.3 Understand the methods used to account for uncollectible receivables (bad debts), estimate bad debt expense and manage the provision for doubtful debts
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