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Accounting For Uncollectible Accounts [Bad Debt]



Businesses must expect to sustain some losses from uncollectible accounts and should therefore show on the balance sheet the net amount of accounts receivable, the amount expected to be collected, rather than the gross amount. The difference between the gross and net amounts represents the estimated uncollectible accounts, or bad debts“. These expenses are attributed to the year in which the sale is made, though they may be realized at a later date. Through this post, we are going to discuss: how to record uncollectible account [Bad Debt], how to compute (calculate) it and what to do if later on it’s become collectible.

There are two methods of recording uncollectible accounts; the “direct write-off method” and the “allowance method“.



Direct Write-Off Method

In small businesses, losses that arise from uncollectible accounts are recognized in the accounts in the period in which they become uncollectible. Under this method, when an account is deemed uncollectible, it is written off the books by a debit to the expense account, Bad Debt Expense, and a credit to the individual customer’s account and to the controlling account.

EXAMPLE: If Lie Dharma Inc.’s $300 account receivable, dated May 15, 200X, was deemed uncollectible in January of 20XX, the entry in 20XX would be:

[Debit]. Bad Debt Expense = $300
[Credit]. Accounts Receivable, Lie Dharma Inc. = $300


Allowance Method

As it is often discussed, one of the fundamentals of accounting is that revenue be matched with expenses in the same year [known as the “matching principle“]. Under the direct write-off method, the loss was not recorded until a year after the revenue had been recognized. The allowance method does not permit this!. The income statement for each period must include all losses and expenses related to the income earned in that period. Therefore, losses from uncollectible accounts should be deducted in the year in which the sale is made. Since it is impossible to predict which particular accounts will not be collected, an adjusting entry is made, usually at the end of the year.

EXAMPLE: assume that in the first year of operation, a firm has estimated that $2,000 of accounts receivable will be uncollectible. The adjusting entry would be:

[Debit]. Bad Debt Expense = $2,000
[Credit]. Allowance for Bad Debt = $2,000


The credit balance of “Allowance for Bad Debt (contra asset)” appears on the balance sheet as a deduction from the total amount of Accounts Receivable:

Accounts Receivable $30,000
Less: Allowance for Bad Debt 2,000

Balance $28,000

The $28,000 will become the estimated realizable value of the accounts receivable at that date. The bad debt expense will appear as an operating expense in the income statement.


Computing Uncollectible Accounts

There are two generally accepted methods of calculating the amount of uncollectible accounts. One method is to use a flat percentage of the net sales for the year. The other method takes into consideration the ages of the individual accounts at the end of the fiscal year. Let’s go further to the details. Read on…


Percentage of Sales Method

Under the percentage of sales method, a fixed percentage of the total sales on account is taken.

EXAMPLE: If charge sales were $200,000 and experience has shown that approximately 1 percent of such sales will become uncollectible at a future date, the adjusting entry for the bad debt account would be:

[Debit]. Bad Debt Expense = $2,000
[Credit]. Allowance for Bad Debt = $2,000


The same amount is used whether or not there is a balance in the “Allowance for Bad Debt account“. However, if any substantial balance should accumulate in the allowance account, a change in the percentage figure would become appropriate.


Balance Sheet Method

Under the balance sheet method, every account is aged; that is, each item in the balance is related to the sale date. The further past due the account, the more probable it is that the customer is unwilling or unable to pay. A typical analysis is shown below:

Uncollectible Account Analysis

NOTE: The calculated allowance for uncollectible accounts ($1,800 above) is reconciled at the end of the year with the actual balance in the allowance account, and an adjusting entry is made. The amount of the adjusting entry must take into consideration the balance of the “Allowance for Bad Debt” account. The percentage of sales method does not follow this procedure.


Recovery of Uncollectible Accounts

If a written-off account is later collected in full or part (a recovery of bad debts), the write-off will be reversed for the amount received.

EXAMPLE: After his account has been written off, Mr. Lie Dharma Putra pays his account in full. The reversing entry to restore his account will be:

[Debit]. Accounts Receivable, Lie Dharma Putra = $600
[Credit]. Allowance for Bad Debt = $600


A separate entry will then be made in the cash receipts journal to record the collection, debiting Cash $600 and crediting Accounts Receivable, Lie Dharma Putra. If a partial collection was made, the reversing entry should be made for the amount recovered.



  1. collen

    Jul 21, 2009 at 8:54 am

    I was just wondering as to what amount between the provision for doubtful and the actual bad debts will be used in the calcutions of debtors in the cashflow statement?

  2. Putra

    Jul 21, 2009 at 11:08 am

    Gidday Collen,

    As far as cash flow statement concern, unlike a cash forecast analysis [which is based on prediction], it is suppose to be a “real-happening-transaction” relate to the cash [in and outflow]. Meanwhile, provision for doubtful of receivable is based on prediction. Therefore, there is no need to care about the provisions. One should simply put the “provisions for doubtful” off the cash flow statement, and put “whatever uncollectible [actual bad debts]” in instead.

  3. Neil Clark

    Oct 1, 2009 at 9:21 pm

    How do you record recovery of bad debt that was written off a few years ago. We had a receivable and corresponding allowance account that was netted to clean the b/s at time of ownership change. Partial recovery was then made on written off a/r. Is this now Misc Inc or is it Bad Debt recovery (negative expense)?

  4. Putra

    Oct 2, 2009 at 11:51 am

    Neil Clark,

    If the bad debt was netted [written off] after the ownership transfer, then you may use either one. But if the receivables were acquired on the net value, then you should not recognize it as “bad debt recovery”, otherwise it will become odd for you [your organization] did not book any bad debt in the past period.

  5. Kenny

    Feb 25, 2010 at 6:19 pm

    On my AR schedule, I have 2%, 7%, 15%, 27% allocated as allowance percentages for 0-30, 31-60, etc. These percentages were carried forward from prior years, but I’m not entirely sure whether they are accurate. How do I know whether these allowance percentages are reasonable to be relied upon to calculate estimated uncollectible expense?

  6. Vasim

    Jun 1, 2010 at 4:26 pm

    Putra, you wrote:
    DR Accounts receivable 600
    CR Allowance for bad debt 600
    DR Cash 600
    CR Accounts receivable 600
    But what about:
    DR Allowance for bad debt 600
    CR Bad debt expense 600
    Shouldn’t we make this additional adjustment.

  7. Jill

    Jun 10, 2010 at 9:26 pm

    what do I do with accounts receiveables from 2008 that we are not going to try and collect for.

  8. Cecilia

    Jan 2, 2013 at 6:34 pm

    I received a payment for a bad debt write off after the fiscal year-end. I have to submit the tax that I am recuperating from the client. Should I create a new invoice or just post the payment through the general?

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