how to account for the allowance for doubtful accounts
the first step in accounting for the allowance for doubtful accounts is to establish the allowance this is done by using one of the estimation methods above to predict what proportion of accounts receivable will go uncollected for this example let s say a company predicts it will incur 500 000 of uncollected accounts receivable to create the allowance the company must debit a loss most often companies use an account called bad debt expense then the company establishes the allowance by crediting an allowance account often called allowance for doubtful accounts though this allowance for doubtful accounts is presented on the balance sheet with other assets it is a contra asset that reduces the balance of total assets let s say six months passes the company now has a better idea of which account receivables will be collected and which will be lost for example say the company now thinks that a total of 600 000 of receivables will be lost this means its allowance of 500 000 is 100 000 short the company must record an additional expense for this amount to also increase the allowance s credit balance note that if a company believes it may recover a portion of a balance it can write off a portion of the account now let s say a specific customer that owes a company 50 000 officially files for bankruptcy this client s account had previously been included in the estimate for the allowance because the company has a very low priority claim without collateral to the debt the company decides it is unlikely it will every receive any of this 50 000 to properly reflect this change the company must reduce its accounts receivable balance by this amount on the other hand once the receivable is removed from the books there is no need to record an associated allowance for this account note that the debit to the allowance for doubtful accounts reduces the balance in this account because contra assets have a natural credit balance also note that when writing off the specific account no income statement accounts are used this is because the expense was already taken when creating or adjusting the allowance by a miracle it turns out the company ended up being rewarded a portion of their outstanding receivable balance they d written off as part of the bankruptcy proceedings of the 50 000 balance that was written off the company is notified that they will receive 35 000 the company can recover the account by reversing the entry above to reinstate the accounts receivable balance and the corresponding allowance for the doubtful account balance then the company will record a debit to cash and credit to accounts receivable when the payment is collected you ll notice that because of this the allowance for doubtful accounts increases a company can further adjust the balance by following the entry under the adjusting the allowance section above 