Monday October 10, 2011 21:35

Doubtful Debt

Posted by Steve Drago as Accounts Receivable, Doubtful Debt, Doubtful Debt Reserve

A Doubtful Debt is a debt that the business or individual is unlikely to collect.  Some reasons this may occur are a dispute over the product or service delivered or the belief that the customer won’t or can’t pay.  When the business determines this may be the case, the debt or a portion of it are added to the Doubtful Debt Reserve account.

The Doubtful Debt Reserve, also known as the Bad Debt Reserve, carries a credit balance in the current assets section of the Balance Sheet.  This  credit balance is created by charging (debiting) Bad Debt Expense in the Income Statement.  Once a doubtful debt becomes uncollectible, it is written off. This means the gross receivables will decrease (a credit) and the Doubtful Debt Reserve will decease (a debit) by the same amount. The amount remaining for this particular uncollectible debt would then be zero.  There is no added expense when the account is written off.

If the specific doubtful debt is collected in full, the Bad Debt Reserve for this debt should be cleared to zero by debiting the bad debt reserve account and crediting the bad debt expense account.

If you have an audit, your auditor will ask you to provide a list of doubtful receivables (customer names, receivable date and amount) that approximate your Bad Debt Reserve. Usually these receivables are all over 90 days old.

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