Allowance for uncollectible accounts is a contra asset account on the balance sheet representing accounts receivable the company does not expect to collect. When customers buy products on credit and then don’t pay their bills, the selling company must write-off the unpaid bill as uncollectible. Allowance for uncollectible accounts is also referred to as allowance for doubtful accounts, and may be expensed as bad debt expense or uncollectible accounts expense.
Finding the proper amount for the allowance for doubtful accounts is not an instant process. More, it is developed over years of operations. To create a standard allowance, have those financial records that indicate how many accounts have not been collected. Then, compare these figures to historical measurements. Then create an average amount of money lost over the number of years measured. This creates historical averages. Once done, a company can compare these to the records of other companies or industry statistics. The company can use this information to attempt to bring this amount to an equal level, as compared to common industry best practices.
Because the allowance for doubtful accounts account is a contra asset account, the allowance for doubtful accounts normal balance is a credit balance. So for an allowance for doubtful accounts journal entry, credit entries increase the amount in this account and debits decrease the amount in this account. The allowance for doubtful accounts account is listed on the asset side of the balance sheet, but it has a normal credit balance because it is a contra asset account, not a normal asset account.
For more ways to add value to your company, download your free A/R Checklist to see how simple changes in your A/R process can free up a significant amount of cash.
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