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Allowance for Doubtful Account - Year End Entries

Hi, Are there any closing entries that need to be made to an allowance for doubtful accounts at year end? We accrue for 1% of monthly revenue under the allowance method. Thanks!

Answers

Topic Expert
Scott MacDonald
Title: President/Owner
Company: AlphaMac Resources, Inc.
(President/Owner, AlphaMac Resources, Inc.) |

I don't generally like to make a re-occuring entry of a flat percentage to the reserve (Income statement). I think the better way to do it is look at your aging and accrue a percentage of each aging group and adjust your allowance (contra asset) account accordingly.

So for example, you could apply a 25% reserve for over 30, 50% reserve for over 60 and 100% for over 90. You should also look at large A/R and make specific reserves for known issues.

Geoff Bosley
Title: Corp Controller
Company: Aperture Credentialing, LLC
(Corp Controller, Aperture Credentialing, LLC) |

Agree, recording a flat percentage of revenue may give undesired results and misstate the allowance. Best bet is to set an allowance like Scott mentioned based on the aging buckets of AR and an allowance rate; just adjust the allowance/bad debt expense account accordingly. Should also set a specific reserve for larger problem receivables where specific information is known about the potential for collection and identify those separately from the "general" allowance. Example: you have a customer that has filed for bankruptcy - you can (and should) make a strong argument that those receivables should be 100% reserved unless there is information available as to the actual $$ to be received. If the receivables are large enough, the flat 1% of monthly revenues could significantly understate the allowance at year-end.

EMERSON GALFO
Title: CFO
Company: C-Suite Services
LinkedIn Profile
(CFO, C-Suite Services) |

Simple answer.....The allowance for doubtful accounts is a contra-asset account. There are NO "closing entries". You close income/expense accounts. You can ADJUST it (affecting bad debts expense that will later be closed and as advised by the previous responses) but NO closing.

EMERSON GALFO
Title: CFO
Company: C-Suite Services
LinkedIn Profile
(CFO, C-Suite Services) |

,

EMERSON GALFO
Title: CFO
Company: C-Suite Services
LinkedIn Profile
(CFO, C-Suite Services) |

Having said that....... (lol)

Base your percentages on historical figures/experience. As advised by previous posters, historically, what percentage of your A/R buckets go uncollectible? Use those percentage to apply to your year-end A/R numbers/buckets so you will have a more historically accurate allowance.

EMERSON GALFO
Title: CFO
Company: C-Suite Services
LinkedIn Profile
(CFO, C-Suite Services) |

Having said that....(again)..

There is a much more nuanced and "account/risk based" (not A/R age based) computation that lending/banking institutions do where individual accounts are classified according to their account status/"health"/risk and the historical percentage is applied to the total of the classifications/risk pool to arrive at monthly or year-end allowances.

Ok..that's it....no more "having said thats"

Pat Voll
Title: Vice President
Company: RoseRyan
(Vice President, RoseRyan) |

I’m a little confused at your question -- are your trying to analyze the collectability of your outstanding AR balance, or are you looking at analyzing your historical revenue returns rate (gross vs net)?

If you are looking at collectability of outstanding AR balances, as others have stated, it is more typical to develop a reserve policy based on applying a percentage to each aging bucket (and adjusting for specific known issues with large accounts, as mentioned) , rather than applying a flat percentage of revenue. You can validate your reserve policy by performing an annual retrospective review of actual payments and write-offs to assess the adequacy of your current allowance based on your actual collection/write-off history.

On the other hand, if you are trying to look at a contra-revenue account, a retrospective analysis of actual returns would be a helpful tool in understanding the adequacy of the revenue reduction you are recording, and any adjustments you might need.

Good luck!

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