How do we record allowance for doubtful accounts

CFA Level I FRA
#1

Hi,

I have few questions about how do we record allowance for doubtful accounts. I am very confused here.

As per my understanding, Allowance for doubtful accounts in the incremental increase over a period of time that represents the bad expense for that period of time and it is a contra asset account which is netted against the Assets accounts receivables

  1. For example : If we start the period with $1,000 allowance for doubtful accounts and we have $500 additional bad debt expense, AR - $10,000 so how would I record it?

Income Statement : Bad Debt Expense (Estimate) : $500 - DR

Balance Sheet : Accounts Receivable: $10,000 - DR
Allowance for Doubtful accounts: $1,000 - CR
+$500 (Additional amount)
Total Allowance for doubtful accounts: $1,500
Net AR: $8,500

Now, WriteOff
$400 is the actual bad debt expense for the period
So, we would reduce AR by $400 since it will not be collected
and reduce Allowance for Doubtful accounts by $400 and we wont record any bad debt expense since we have already estimated.

#2

@S2000magician @Greybeard_The_Elder - Could you please help me here

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#3

Greetings friend! At a quick read-through it seems like you’ve got it down correctly. Bearing in mind I am not an accounting guru, but here’s my understanding:

The first step is to record the $500 additional bad debt expense on the income statement as a debit, and to credit the allowance for doubtful accounts “contra asset account” in an equal amount of $500 (so it becomes $1,000 + $500 = $1,500).

When you later determine that $400 actually is noncollectable, you debit (reduce) the $400 against your allowance for doubtful accounts contra asset account, and credit (reduce) the same amount against your accounts receivable asset account. You don’t then expense it against income again. For a helpful short summary, you can see here:
https://www.dfa.cornell.edu/accounting/topics/revenueclass/baddebt

Cheers - good luck - you got this :+1:

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