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ashley13
March 12, 2019
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How do I setup allowance for doubtful accounts?

  • March 12, 2019
  • 4 replies
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I already have a Bad Debt setup in Chart of Accounts and within Items but from there where do I go?

Do I simply create a credit memo for the customer and then only apply it if they do indeed pay us?

Thanks

Best answer by NEVER

What I have done for several clients is: create an A/R type account (sub-account of A/R) in the COA called A/R Doubtful. When a receivable is getting old, I open the invoice and select the A/R Doubtful account instead of the A/R. This effectively moves the transaction out of the main A/R and is easily identifiable. At yearend, if you are 100% certain that payment is not forthcoming, create the credit memo using the Bad Debt item and notify your Accountant that everything in the Bad Debt Account is to be written off.

4 replies

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NEVERAnswer
March 12, 2019

What I have done for several clients is: create an A/R type account (sub-account of A/R) in the COA called A/R Doubtful. When a receivable is getting old, I open the invoice and select the A/R Doubtful account instead of the A/R. This effectively moves the transaction out of the main A/R and is easily identifiable. At yearend, if you are 100% certain that payment is not forthcoming, create the credit memo using the Bad Debt item and notify your Accountant that everything in the Bad Debt Account is to be written off.

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    Anonymous
    March 12, 2019
    Thats a nice way to separate the problem accounts! of course you still also l have to create the ADR contra-asset account and fill it.
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      Malcolm Ziman
      March 12, 2019
      Allowance for doubtful accounts, is not customer specific.  It's a reduction of the receivable asset, posted  at year-end, an estimate based on historical data, - so you may create an allowance for say 5% of your total receivables at year-end, because that is the historical statistic for the business. The entry is dr. Bad Debt expense, cr Allowance (current asset).  Then when a specific customer's debt is written off, instead of it going to Bad Debt expense, it goes to the Allowance.  If you don't use an allowance you only write off a customer's debt when you are fairly certain that it is bad. You can do that by creating a Credit Memo (using an item linked to Bad Debt expense) or a Journal Entry if there is no sales tax: dr. Bad Debt expense, cr AR/customer 
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        Anonymous
        March 12, 2019

        Generally correct but

        Ashley is likely in Canada, and the CRA tax rule/policy is that the "Allowance for Doubtful Receivables" must be based on specifically identified customers & invoices - not just a general overall percentage of AR.  You can still apply percentages to those specific customer & bills based on your estimated likelihood of collection.  I just export an AR aging to spreadsheet and then run down the overdue columns and add a factor column for estimated loss ratio with the extended total.  Basically you have to show that you have tried to make a reasonable assessment based on actual account conditions.

        I do use use 'general % allowance' as a way to create a monthly expense to add to ADR.

        You only have to make the detailed analysis and list at the year-end to backup the amount on the balance sheet at that time. 

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        Malcolm Ziman
        March 12, 2019
        ""Allowance for Doubtful Receivables" must be based on specifically identified customers & invoices"
        whether it's an allowance or not, an expense is created, which reduces your taxable income- so why would the tax people be concerned with where the credit goes - direct to AR or to an allowance?
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        dso0216
        May 31, 2021

        The allowance for doubtful accounts is for GAAP financials, the purpose is the matching principle, to determine the true profiability of sales.  In QB the entry appears to be a "work around" as the A/R accounts must be a specfic customer.  The AR allowance account is basically a reserve or estimate.

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