[Topsya]

Hey guys!

I need your professional opinion on some “interesting” accounting methods I have to use at work.

Particularly – methods for Allowance for Doubtful Accounts.

I just have my doubts regarding the “correctness” of the way they are doing it.

Anyways, here is the situation.

4 times a year (well, quarterly) we determine which receivables are collectible or not.

Lets say we’ve got $10,000 AR and we determine that $3,000 of those are not collectible.

Now we make a JE

(let’s call it entry #1)

DR – Bad Debt Expense

CR – Allowance for Doubtful Accounts

This all is fine. However, when we write off a receivable, we do it this way:

(entry #2)

Dr – Bad Debt Expense

Cr – AR

And then, 3 month later, when quarter ends, we REVERSE the entry #1 and make a new determination which receivables are collectible or not…. etc… then repeat steps 1 and 2

Isn’t it a little bit…. Cancels the whole concept of accrual accounting? DOES ANYONE ELSE DO IT THIS WAY? What kind of an accounting is that???

AUD - 90
FAR - 83
BEC - 81
REG - 80
ETHICS - 100

[NYCaccountant]

Thats technically wrong. The whole purpose of the allowance account is to estimate bad debt for a particular time frame and match up revenue and expenses, so if I estimated 5,000 of my receivables were bad debt at the end of Q1, and then I wrote off 5,000 of AR in Q2, this should not be reflected in my income statement for Q2 at all. The bad debt occurred in Q1, when I recorded the expense and when I earned the revenue. The fact they post the credit to bad debt expense is wrong.

And when you write off bad debt, how do you debit AR? You would be overstating your receivables, understating your expenses. Even though this is wrong, I would probably not worry to much if the difference quarter over quarter, year over year is immaterial. Immaterial solves everything lol.

Thats probably why it's done now, to overstate receivables and understate expenses.

FAR - 93
REG - 87
BEC - 84!!!!
AUD - 99!!!!!! CPA exam complete.

[NYCaccountant]

Thats technically wrong. The whole purpose of the allowance account is to estimate bad debt for a particular time frame and match up revenue and expenses, so if I estimated 5,000 of my receivables were bad debt at the end of Q1, and then I wrote off 5,000 of AR in Q2, this should not be reflected in my income statement for Q2 at all. The bad debt occurred in Q1, when I recorded the expense and when I earned the revenue. The fact they post the credit to bad debt expense is wrong.

And when you write off bad debt, how do you debit AR? You would be overstating your receivables, understating your expenses. Even though this is wrong, I would probably not worry to much if the difference quarter over quarter, year over year is immaterial. Immaterial solves everything lol.

Thats probably why it's done now, to overstate receivables and understate expenses.

FAR - 93
REG - 87
BEC - 84!!!!
AUD - 99!!!!!! CPA exam complete.

[Jordan23cc]

Seems pretty aggressive. Write offs should dr. ADA and cr. AR. May not necessarily be fraudulent, but that's definitely not GAAP.

F - 2/15/2014 - 85
B - 2/26/2014 - 88
R - 4/1/2014 - 83
A - 4/21/2014 - 95

Licensed CPA in TX

I can do all things through Christ who strengthens me.

[Jordan23cc]

Seems pretty aggressive. Write offs should dr. ADA and cr. AR. May not necessarily be fraudulent, but that's definitely not GAAP.

F - 2/15/2014 - 85
B - 2/26/2014 - 88
R - 4/1/2014 - 83
A - 4/21/2014 - 95

Licensed CPA in TX

I can do all things through Christ who strengthens me.

[Topsya]

no no no

SORRY

entry #2

CR – Bad Debt Expense

Dr – AR

AUD - 90
FAR - 83
BEC - 81
REG - 80
ETHICS - 100

[Topsya]

no no no

SORRY

entry #2

CR – Bad Debt Expense

Dr – AR

AUD - 90
FAR - 83
BEC - 81
REG - 80
ETHICS - 100

[acamp]

Without trying to follow all that.

Bad debt expense should not be reversed unless the receivable becomes good (really, paid is going to be the most convincing event). A/R should only be credited with an offsetting debit to the bad debt allowance. A write-off (provided their is already an allowance) should have zero P&L impact.

Now if they just have a funky accounting, and are reversing and re-booking after re-evaluating whats bad, my concern would be if this starts to cross periods? Not to mention, this leaves things way open for “new judgment” to decide that maybe something is not so bad after all (whereas, really, no further consideration should generally be made on bad debts that have been allowed for, unless a material event reverses the original decision).

Ninja + Wiley Test Bank: [FAR - 81] [REG - 76] [BEC - 88] [AUD - 73](doh!)

Becker Videos: [AUD - 82]

California CPA

[acamp]

Without trying to follow all that.

Bad debt expense should not be reversed unless the receivable becomes good (really, paid is going to be the most convincing event). A/R should only be credited with an offsetting debit to the bad debt allowance. A write-off (provided their is already an allowance) should have zero P&L impact.

Now if they just have a funky accounting, and are reversing and re-booking after re-evaluating whats bad, my concern would be if this starts to cross periods? Not to mention, this leaves things way open for “new judgment” to decide that maybe something is not so bad after all (whereas, really, no further consideration should generally be made on bad debts that have been allowed for, unless a material event reverses the original decision).

Ninja + Wiley Test Bank: [FAR - 81] [REG - 76] [BEC - 88] [AUD - 73](doh!)

Becker Videos: [AUD - 82]

California CPA

[Kenada]

Hmmmm

So this is how my company does it and we use our AR Aging to determine how much provision to make for bad debts.

Bad Debts are provided for Aging balances 7-12months – 25%, over 12 mths 100%.

First JE that is done

Dr Bad Debt Expense provision

CR Allowance for Bad Debts.

We true or down the Allowance for Bad debts every month end depending on the ending AR Aging balances.

When it come to Year end – this is where AR determines what should be a Write off from the AR balances because we are never going to collect it.

Once they know what needs to be W/off they JE that will happen is

DR AR Bad Debt expense W/offs

(note its a different p&L account we use. So we separately show what is BD provision / BD W/off. Both roll under BD's Expenses in the P&L)

CR AR Control Account

Now because they have done this – It automatically will reflect a reduction in the AR aging balance for the months 7-12 and over 12 months. So when we do our Bad Debt provisions at month end I could end up doing a JE where I am reducing Bad Debt Expense and reducing my Bad debt provision.

IE DR Allowance for Bad Debts

CR Bad Debt expense

This assumes that I don't have any new bad debt provision made that in the month.

If I have new provisions then my JE would reflect the Net impact of the BD provision i need to make for month end.

Anyway, this is how my current company does bad debts as well as the company I worked for before this.

CA Candidate. 05/27/2014 ~ 786/110
I am done!!

[Kenada]

Hmmmm

So this is how my company does it and we use our AR Aging to determine how much provision to make for bad debts.

Bad Debts are provided for Aging balances 7-12months – 25%, over 12 mths 100%.

First JE that is done

Dr Bad Debt Expense provision

CR Allowance for Bad Debts.

We true or down the Allowance for Bad debts every month end depending on the ending AR Aging balances.

When it come to Year end – this is where AR determines what should be a Write off from the AR balances because we are never going to collect it.

Once they know what needs to be W/off they JE that will happen is

DR AR Bad Debt expense W/offs

(note its a different p&L account we use. So we separately show what is BD provision / BD W/off. Both roll under BD's Expenses in the P&L)

CR AR Control Account

Now because they have done this – It automatically will reflect a reduction in the AR aging balance for the months 7-12 and over 12 months. So when we do our Bad Debt provisions at month end I could end up doing a JE where I am reducing Bad Debt Expense and reducing my Bad debt provision.

IE DR Allowance for Bad Debts

CR Bad Debt expense

This assumes that I don't have any new bad debt provision made that in the month.

If I have new provisions then my JE would reflect the Net impact of the BD provision i need to make for month end.

Anyway, this is how my current company does bad debts as well as the company I worked for before this.

CA Candidate. 05/27/2014 ~ 786/110
I am done!!

[nicole2035]

@kenada that's similar to what the company i work for does.

To me that would look very misleading on your financial statements, especially if the estimate is a considerable number.

[nicole2035]

@kenada that's similar to what the company i work for does.

To me that would look very misleading on your financial statements, especially if the estimate is a considerable number.

[Topsya]

… this all is not exactly GAAP though, am I right?

AUD - 90
FAR - 83
BEC - 81
REG - 80
ETHICS - 100

[Topsya]

… this all is not exactly GAAP though, am I right?

AUD - 90
FAR - 83
BEC - 81
REG - 80
ETHICS - 100

[Kenada]

@ OP – The way your company does it – does seem a bit odd.

I get what they are trying to do but hmmmmm.. is this a large company that you work for?

CA Candidate. 05/27/2014 ~ 786/110
I am done!!

[Author]

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