Current Expected Credit Loss (CECL) ASC 326 is a standard issued by the Financial Accounting Standards Board (FASB) and this is a requires companies to estimate expected credit losses over the life of a financial asset. This standard primarily affects banks, lenders, and other financial institutions, as it changes the way credit losses are calculated and recorded on loans and other financial instruments.
CECL Journal Entry Examples
Example 1: Initial Recognition of Expected Credit Losses
Let’s say a bank a loan portfolio of $1,000,000 and an expected credit loss estimate of $50,000 at the time of CECL implementation.
Journal Entry:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 01-01-2024 | Provision for Credit Losses A/c Debit | 50,000 | |
| 01-01-2024 | To Allowance for Credit Losses A/c | 50,000 |
Explanation:
- Provision for Credit Losses will debited to recognize the expected credit losses as an expense on the income statement.
- Allowance for Credit Losses will credited to increase the allowance on the balance sheet, reducing the net carrying amount of the loan portfolio.
Example 2: Adjusting the Allowance for Credit Losses
Suppose after one year, the bank reevaluates its expected credit losses and decides the losses should be increased by $10,000.
Journal Entry:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 12-31-2024 | Provision for Credit Losses A/c Debit | 10,000 | |
| 12-31-2024 | To Allowance for Credit Losses A/c | 10,000 |
Explanation:
- Provision for Credit Losses will debited to reflect the additional expected credit losses.
- Allowance for Credit Losses will credited to increase the allowance further.
Example 3: Writing Off an Uncollectible Loan
Assume a specific loan of $20,000 is deemed uncollectible, and the bank decides to write it off.
Journal Entry:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 03-01-2025 | Allowance for Credit Losses A/c Debit | 20,000 | |
| 03-01-2025 | To Loans Receivable A/c | 20,000 |
Explanation:
- Allowance for Credit Losses will debited to reduce the allowance account.
- Loans Receivable will credited to remove the uncollectible loan from the balance sheet.
Example 4: Recovery of Previously Written-Off Loan
If the bank recovers $5,000 from a loan previously written off, it should reverse the write-off.
Journal Entry:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 06-01-2025 | Bank A/c Debit | 5,000 | |
| 06-01-2025 | To Allowance for Credit Losses A/c | 5,000 |
Explanation:
- Bank will debited to reflect the receipt of funds.
- Allowance for Credit Losses will credited to restore the allowance, reflecting the recovery.
Summary of CECL Journal Entries
- Initial Recognition: Record a expected credit losses by debiting Provision for Credit Losses and crediting Allowance for Credit Losses.
- Adjustment: Adjust the allowance it is needed based on new information, debiting or crediting Provision for Credit Losses.
- Write-Off: When a loan is deemed uncollectible, debit Allowance for Credit Losses and credit Loans Receivable.
- Recovery: If a previously written-off loan is recovered, debit Cash and credit Allowance for Credit Losses.
These journal entries ensure compliance with CECL requirements, providing a more forward-looking approach to estimating and recognizing credit losses.
The Current Expected Credit Loss (CECL) model requires companies, especially financial institutions, to estimate and record expected credit losses over the life of a financial asset. The CECL model is more proactive compared to the previous incurred loss model, it is a mandates losses be recognized earlier. Here’s how you would record journal entries under the CECL model.
1. Initial Recognition of Expected Credit Losses
Let’s say a bank issues a loan of $1,000,000 and estimates a expected credit loss of $30,000 at the time of issuance.
Journal Entry:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 01-01-2024 | Provision for Credit Losses A/c Debit | 30,000 | |
| 01-01-2024 | To Allowance for Credit Losses A/c | 30,000 |
Explanation:
- Provision for Credit Losses will debited to recognize the expense related to the expected credit losses.
- Allowance for Credit Losses will credited to create a contra asset account, reducing the carrying value of the loan on the balance sheet.
2. Adjustment of Expected Credit Losses
After one year, the bank reassesses expected credit loss for the same loan and decides to increase the allowance by $5,000.
Journal Entry:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 12-31-2024 | Provision for Credit Losses A/c Debit | 5,000 | |
| 12-31-2024 | To Allowance for Credit Losses A/c | 5,000 |
Explanation:
- Provision for Credit Losses will debited to recognize additional expected credit losses.
- Allowance for Credit Losses will credited to increase the allowance for loan losses.
3. Writing Off an Uncollectible Loan
If the bank determines a portion of the loan, say $20,000, it is a uncollectible, they would write it off.
Journal Entry:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 03-01-2025 | Allowance for Credit Losses A/c Debit | 20,000 | |
| 03-01-2025 | To Loans Receivable A/c | 20,000 |
Explanation:
- Allowance for Credit Losses will debited to reduce the allowance account by the amount of the uncollectible loan.
- Loans Receivable will credited to remove the uncollectible amount from the books.
4. Recovery of Previously Written-Off Loan
If $5,000 is recovered from a loan was previously written off, the following entry would be made.
Journal Entry:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 06-01-2025 | Bank A/c Debit | 5,000 | |
| 06-01-2025 | To Allowance for Credit Losses A/c | 5,000 |
Explanation:
- Bank will debited to recognize the inflow of recovered funds.
- Allowance for Credit Losses will credited to restore the allowance, reflecting the recovered amount.
5. Reversing or Reducing Expected Credit Losses
If the expected credit loss decreases, for example, by $10,000 due to an improvement in economic conditions or borrower credit worthiness:
Journal Entry:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 08-01-2025 | Allowance for Credit Losses A/c Debit | 10,000 | |
| 08-01-2025 | To Provision for Credit Losses A/c | 10,000 |
Explanation:
- Allowance for Credit Losses will debited to reduce the allowance account.
- Provision for Credit Losses will credited to reduce the expense recognized.
Summary of CECL Journal Entries
- Initial Recognition: Record expected credit losses by debiting Provision for Credit Losses and crediting Allowance for Credit Losses.
- Adjustment: Adjust the allowance for expected credit losses as necessary.
- Write-Off: Debit Allowance for Credit Losses and credit Loans Receivable to write off uncollectible amounts.
- Recovery: Debit Cash and credit Allowance for Credit Losses to record recovered amounts.
- Reversing: Debit Allowance for Credit Losses and credit Provision for Credit Losses if the expected credit loss decreases.
These entries ensure company’s financial statements accurately reflect the expected risk of credit losses, as required under the CECL standard.