[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

[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

[Mayo]

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

“I'm guessing the CFO gets away with it because it's immaterial, and they are most likely understating expenses.”

I actually think expenses are recorded correctly for the end of the period. Remember, whatever Bad Debt they initially book, is then reversed at the end of the period, then re-estimated, and then booked based on that new estimate. In addition, the weird write off entry ensures that those AR balances also record a Bad debt expense.

I think he gets away with it because it ends up working if there are no complications. Topsya, I'm curious…if a previously written off AR decides to pay….how do you reinstate the AR with that goofy method your company is using?

Mayo, BBA, Macc

[Mayo]

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

“I'm guessing the CFO gets away with it because it's immaterial, and they are most likely understating expenses.”

I actually think expenses are recorded correctly for the end of the period. Remember, whatever Bad Debt they initially book, is then reversed at the end of the period, then re-estimated, and then booked based on that new estimate. In addition, the weird write off entry ensures that those AR balances also record a Bad debt expense.

I think he gets away with it because it ends up working if there are no complications. Topsya, I'm curious…if a previously written off AR decides to pay….how do you reinstate the AR with that goofy method your company is using?

Mayo, BBA, Macc

[Topsya]

A-ha!

In case they decide to pay, we have a special account – “Recover of Bad Debt”. It's a revenue account

Dr – Cash

Cr – Recovery of Bad Debt

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

[Topsya]

A-ha!

In case they decide to pay, we have a special account – “Recover of Bad Debt”. It's a revenue account

Dr – Cash

Cr – Recovery of Bad Debt

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

[Mayo]

smh….I wouldn't be surprised if he eventually reclasses that Recovery revenue to regular operating revenue.

See this is where it really breaks down…

1. Shouldn't revenue be recognized when you book AR?

Dr. AR 100

Cr. Sales Revenue 100

2. Per GAAP, the allowance should be increased, but it's not.

Issue #2 is probably never material enough to matter, and one can argue it creates a more accurate Net AR balance. But issue #1 creates problems and could lead to overstating revenue.

Am I missing something? I mean…what's your typical AR entry? Say John Doe buys your product/uses your service…don't you book revenue?

Mayo, BBA, Macc

[Mayo]

smh….I wouldn't be surprised if he eventually reclasses that Recovery revenue to regular operating revenue.

See this is where it really breaks down…

1. Shouldn't revenue be recognized when you book AR?

Dr. AR 100

Cr. Sales Revenue 100

2. Per GAAP, the allowance should be increased, but it's not.

Issue #2 is probably never material enough to matter, and one can argue it creates a more accurate Net AR balance. But issue #1 creates problems and could lead to overstating revenue.

Am I missing something? I mean…what's your typical AR entry? Say John Doe buys your product/uses your service…don't you book revenue?

Mayo, BBA, Macc

[Topsya]

we do recognize revenue when AR is booked

Dr – AR

Cr – Revenue

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

[Topsya]

we do recognize revenue when AR is booked

Dr – AR

Cr – Revenue

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

[Mayo]

Hmmm,

What is Double Booking revenue?

*ding ding*

I'd be concerned about the judgment behind how they determine which AR account is noncollectable. It's an easy cookie-jar mechanic.

“Oh we need more revenue? Hmmm, ok….let's make these $100k of AR uncollectible. What's that? How do I know it's uncolectible? I'm the CFO dammit!” Then when they end up paying Revenue goes up.

If I was the auditor, I'd be tempted to make them scrap that whole method. It's just too ripe for abuse.

Mayo, BBA, Macc

[Mayo]

Hmmm,

What is Double Booking revenue?

*ding ding*

I'd be concerned about the judgment behind how they determine which AR account is noncollectable. It's an easy cookie-jar mechanic.

“Oh we need more revenue? Hmmm, ok….let's make these $100k of AR uncollectible. What's that? How do I know it's uncolectible? I'm the CFO dammit!” Then when they end up paying Revenue goes up.

If I was the auditor, I'd be tempted to make them scrap that whole method. It's just too ripe for abuse.

Mayo, BBA, Macc

[Topsya]

lol

many ppl tried to change it, but someone here is too damn stubborn

it's whatever.

Cannot wait to get my license and leave lol

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

[Topsya]

lol

many ppl tried to change it, but someone here is too damn stubborn

it's whatever.

Cannot wait to get my license and leave lol

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

[Author]

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