Accounting Help - Accounts Receivable Accounting - Doubtful Balances
Watch here selected accounting help topic video - accounts receivable accounting covering doubtful balances.
In case goods are sold on credit, i.e. customers are allowed to pay for the purchases after some period of time passes, the seller following the accrual principle has to account for Sales Revenue and Accounts Receivable at the moment when goods are sold.
Accounts Receivable reflect a right of the seller to claim back payment from the customer for the goods sold. It might happen that customer gets insolvent, fails to repay its debt.
Such non-payment is a loss for seller and this loss must be accounted for in the books of the seller to reflect a fair balance of the Accounts Receivable, i.e. that balance, which can be recovered.
If there is a chance to get the debt back, Allowance Method is used to account for Doubtful Accounts Receivable, i.e. the following entry is made:
D Expenses XXXX
C Allowance for doubtful Accounts Receivable
XXXX
If later on it occurs that the debt from customer will never be recovered, such balance has to be written off and this is done by decreasing Allowance, i.e.:
D Allowance for doubtful Accounts Receivable
XXXX
C Accounts Receivable XXXX
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