The following year, Company X has ascertained that Customer A has filed for bankruptcy and will no longer be able to recover the outstanding amount due from them in the amount of $15,000. The Accounts Receivable balance on Decemis $195,000.Ĭompany X will record the Provision for Bad Debts with the following journal entry: When it can be ascertained that the amount is uncollectible, another entry will be passed which will reduce the Provision for Bad Debts / Allowance for Bad Debts and also reduce the Accounts Receivable account.Īllowance for Bad Debts journal entry example:Įxamples of Provision for Bad (and Doubtful) Debts Journal EntriesĪt the end of the accounting period for the year 2020, Company X has estimated that 20% of their Accounts Receivable balance will become uncollectible based on the company’s previous history. With this method, an Allowance for Bad Debts is recorded which is a contra asset and reported in the balance sheet as a reduction from the Accounts Receivable account. Instead of directly writing off the bad debts account from the books, an allowance is first recorded and is typically done for receivables with material amounts. The journal entry under the Direct Method can be posted as follows: Allowance Method In turn, the total collectible is reduced and so does the Net Income of the company. The Direct Method directly records bad debts against the receivable account. There are two methods to record a company’s Bad Debt: The Direct Method and the Allowance Method. Journal Entries in Case of Bad Debt and Provision When doubtful debts are proven to be irrecoverable or uncollectible, they will be written off as bad debts in the company’s books and subsequently be removed from the accounts receivable balance. Doubtful Debtsĭoubtful debts refer to outstanding invoices that do not provide a clear picture of when it is going to be paid – if it is going to be paid at all. There are three different types of debts: Good Debtsĭebts that will eventually be paid and do not pose any signs of it being uncollectible are referred to as a Good Debt. The provision is necessary to be recognized because knowing the amount of loss is difficult to ascertain until it actually happens. This is in line with the accrual basis of accounting – probable expenses are recognized when invoices (sales) are issued to customers.
The provision for Bad Debts refers to the total amount of Doubtful Debts that need to be written off for the next accounting period.ĭoubtful Debt represents an expense that reduces the total accounts receivable of a company for a specific period.
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