The Allowance for Uncollectible Accounts (also known as the Allowance for Doubtful Accounts or Bad Debt Allowance) is an account used to estimate the portion of a company’s receivables that may not be collected. This account is critical for matching expenses to the period in which the related revenue is recognized, adhering to the matching principle in accounting.
1. Establishing the Allowance for Uncollectible Accounts
To record an estimate of uncollectible accounts, the company makes an adjusting journal entry at the end of the accounting period.
Example: Estimating Uncollectible Accounts
Assume your business estimates that $5,000 of its accounts receivable will be uncollectible at the end of the year, December 31, 2024.
Journal Entry on December 31, 2024:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 12-31-2024 | Bad Debt Expense | 5,000 | |
| 12-31-2024 | To Allowance for Uncollectible Accounts | 5,000 |
Explanation:
- Bad Debt Expense will debited to recognize the estimated cost of uncollectible accounts as an expense.
- Allowance for Uncollectible Accounts will credited as a contra-asset account to offset the Accounts Receivable balance, representing the amount that is not expected to be collected.
2. Writing Off an Uncollectible Account
When a specific account is deemed uncollectible, it is written off against the allowance account.
Example: Writing Off a Specific Account
Assume a customer owes $2,000 and, after attempts to collect the amount, your business determines that this account is uncollectible on March 15, 2025.
Journal Entry on March 15, 2025:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 03-15-2025 | Allowance for Uncollectible Accounts | 2,000 | |
| 03-15-2025 | To Accounts Receivable | 2,000 |
Explanation:
- Allowance for Uncollectible Accounts will debited to reduce the allowance account because the specific receivable is being written off.
- Accounts Receivable will credited to remove the uncollectible amount from the books.
3. Recovering a Previously Written-Off Account
If a customer unexpectedly pays an account that was previously written off, the business needs to reverse the write-off and then record the cash receipt.
Example: Recovering a Written-Off Account
Assume the customer from the previous example unexpectedly pays $2,000 on April 10, 2025.
Journal Entry to Reverse the Write-Off on April 10, 2025:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 04-10-2025 | Accounts Receivable | 2,000 | |
| 04-10-2025 | To Allowance for Uncollectible Accounts | 2,000 |
Explanation:
- Accounts Receivable will debited to reinstate the receivable.
- Allowance for Uncollectible Accounts will credited to increase the allowance account back to its previous balance.
Journal Entry to Record Cash Receipt on April 10, 2025:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 04-10-2025 | Cash | 2,000 | |
| 04-10-2025 | To Accounts Receivable | 2,000 |
Explanation:
- Cash will debited to record the receipt of cash from the customer.
- Accounts Receivable will credited to remove the receivable since it has now been paid.
4. Adjusting the Allowance for Uncollectible Accounts
At the end of the next accounting period, the allowance may need to be adjusted based on new estimates of uncollectible accounts.
Example: Adjusting the Allowance
Assume that at the end of 2025, the company estimates that $7,000 of accounts receivable may be uncollectible, and the current balance in the Allowance for Uncollectible Accounts is $3,000.
Journal Entry on December 31, 2025:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 12-31-2025 | Bad Debt Expense | 4,000 | |
| 12-31-2025 | To Allowance for Uncollectible Accounts | 4,000 |
Explanation:
- Bad Debt Expense will debited for the difference needed to bring the allowance to the estimated $7,000.
- Allowance for Uncollectible Accounts will credited to increase the allowance to the desired balance.
These journal entries ensure that uncollectible accounts are properly accounted for, aligning the financial statements with the anticipated realizable value of receivables.