[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

[Mayo]

Sorry, I was thinking entry #2 was debiting allowance….

So…you're saying..

at 3/31 you book

Dr. Bad Debt. 200

Cr. Allowance. 200

So afterwards you determine 100 is completely uncollectible and write off by entry #2:

Dr. AR. 100

Cr. Bad Debt 100

Then at 6/30 you reverse #1

Dr. Allowance. 200

Cr. Bad Debt. 200

So….you effectively have an extra $100 in AR and $100 less in Bad Debt….oh boy. That's worse than I originally thought before. What the F are they doing? Plus, how the hell is entry #2 a write off? The AR is still on the books.

Not sure if I'm understanding all this. You say entry 2 increases expenses but then you say

“no no no

SORRY

entry #2

CR – Bad Debt Expense

Dr – AR”

I'm confused here lol…

Mayo, BBA, Macc

[Mayo]

Sorry, I was thinking entry #2 was debiting allowance….

So…you're saying..

at 3/31 you book

Dr. Bad Debt. 200

Cr. Allowance. 200

So afterwards you determine 100 is completely uncollectible and write off by entry #2:

Dr. AR. 100

Cr. Bad Debt 100

Then at 6/30 you reverse #1

Dr. Allowance. 200

Cr. Bad Debt. 200

So….you effectively have an extra $100 in AR and $100 less in Bad Debt….oh boy. That's worse than I originally thought before. What the F are they doing? Plus, how the hell is entry #2 a write off? The AR is still on the books.

Not sure if I'm understanding all this. You say entry 2 increases expenses but then you say

“no no no

SORRY

entry #2

CR – Bad Debt Expense

Dr – AR”

I'm confused here lol…

Mayo, BBA, Macc

[Mayo]

Some firms can use OCBOA, which isn't GAAP. But not sure what the details there are…

Mayo, BBA, Macc

[Mayo]

Some firms can use OCBOA, which isn't GAAP. But not sure what the details there are…

Mayo, BBA, Macc

[Topsya]

@Mayo

here it is – don't get confused))))

at 3/31 I book

Dr. Bad Debt. 200

Cr. Allowance. 200

So afterwards I determine 100 is completely uncollectible and write off by entry #2:

Dr. BAD DEBT EXPENSE 100

Cr. AR 100

Then at 6/30 I reverse #1

Dr. Allowance. 200

Cr. Bad Debt. 200

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

[Topsya]

@Mayo

here it is – don't get confused))))

at 3/31 I book

Dr. Bad Debt. 200

Cr. Allowance. 200

So afterwards I determine 100 is completely uncollectible and write off by entry #2:

Dr. BAD DEBT EXPENSE 100

Cr. AR 100

Then at 6/30 I reverse #1

Dr. Allowance. 200

Cr. Bad Debt. 200

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

[Mayo]

*smh*

That's friggin goofy. But it's fine and it's GAAP.

Consider the way we normally are taught to book this:

Initial estimate:

Dr. Bad Debt

Cr. Allowance

Write Off:

Dr. Allowance

Cr. AR

so…effectively Allowance can be cancelled out, and you get:

Dr. Bad Debt

Cr. AR

Plus, you get an accurate ALlowance and Bad Debt balance since you revere and re-estimate every period. It's just a short cut. But it's convoluted and hard to track on a transaction by transaction basis.

Mayo, BBA, Macc

[Mayo]

*smh*

That's friggin goofy. But it's fine and it's GAAP.

Consider the way we normally are taught to book this:

Initial estimate:

Dr. Bad Debt

Cr. Allowance

Write Off:

Dr. Allowance

Cr. AR

so…effectively Allowance can be cancelled out, and you get:

Dr. Bad Debt

Cr. AR

Plus, you get an accurate ALlowance and Bad Debt balance since you revere and re-estimate every period. It's just a short cut. But it's convoluted and hard to track on a transaction by transaction basis.

Mayo, BBA, Macc

[Anonymous]

It is sort of weird and not technically how you should do it but I think it gets you to a very similar place.

At 3/31 – You expect $200 of current AR to be uncollectible so you debit expense and credit the allowance for that amount. That's good.

At 4/30 – You know for a fact that 100 of that needs to be written off so you credit AR for 100 (good) and then debit bad debt expense for 100. At this point in time you have $300 in bad debt expense recorded – which is overstated/double booked because 100 of that was included within the 200 to begin with.

6/30 – Now you reverse the prior allowance entry completely (setting right the double booking made in the 4/30 entry (good – although technically this should have been done at 4/30). And re-estimate the amounts sitting in AR that are uncollectible.

The end effect is that month-to-month it won't be right but quarter-to-quarter it will be. And if you only report quarterly or yearly – that's good enough – you are in compliance with GAAP.

[Anonymous]

It is sort of weird and not technically how you should do it but I think it gets you to a very similar place.

At 3/31 – You expect $200 of current AR to be uncollectible so you debit expense and credit the allowance for that amount. That's good.

At 4/30 – You know for a fact that 100 of that needs to be written off so you credit AR for 100 (good) and then debit bad debt expense for 100. At this point in time you have $300 in bad debt expense recorded – which is overstated/double booked because 100 of that was included within the 200 to begin with.

6/30 – Now you reverse the prior allowance entry completely (setting right the double booking made in the 4/30 entry (good – although technically this should have been done at 4/30). And re-estimate the amounts sitting in AR that are uncollectible.

The end effect is that month-to-month it won't be right but quarter-to-quarter it will be. And if you only report quarterly or yearly – that's good enough – you are in compliance with GAAP.

[Mayo]

Also, if we were analyzing journal entries for an audit, this would pop out, and we'd have to follow up with the client. Just a waste of time IMO.

Mayo, BBA, Macc

[Mayo]

Also, if we were analyzing journal entries for an audit, this would pop out, and we'd have to follow up with the client. Just a waste of time IMO.

Mayo, BBA, Macc

[NYCaccountant]

But if it's immaterial, I doubt there is a serious issue. Even though it's the wrong way to do it, if you end up with the correct or relatively close to the correct balance, how much does it matter in the end?

I'm guessing the CFO gets away with it because it's immaterial, and they are most likely understating expenses. @Topsya, when I look at your example, the expenses for the time period would be $100 understated.

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

[NYCaccountant]

But if it's immaterial, I doubt there is a serious issue. Even though it's the wrong way to do it, if you end up with the correct or relatively close to the correct balance, how much does it matter in the end?

I'm guessing the CFO gets away with it because it's immaterial, and they are most likely understating expenses. @Topsya, when I look at your example, the expenses for the time period would be $100 understated.

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

[Topsya]

@NYCaccountant

Expenses are actually OVERstated…. unless you and I are looking at different examples lol

And I wouldnt say entries are immaterial either…

it's a family company and CFO is not a CPA, not even close. And he makes up accounting rules as he goes. There are many more weird things going on here, but this particular one is just really bugging me

@Anonny. You said “you are in compliance with GAAP”. Even though we completely ignore the principals of accrual accounting?

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

[Author]

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