How To Account for Bad Debt in Accounts Receivable

Bank managers have no trouble in scrutinizing accounts receivable and figuring out if there is a bad debt. Once an account shows that it may have possible red flags or issues, managers would be able to make a determination if there is still a possibility for the account owner to attain an allowance for his bad debt. This could be done by using a particular percentage of the owner’s accounts receivable.

Although it may sound complicated, accounting for a bad debt in one's accounts receivable is relatively easy, just as long as you know what you are doing. If not, then you just might be in way over your head. Fortunately for you, this article will discuss just how to account for bad debt in accounts receivable. Hopefully, after reading this article, you should be able to do just that with little to no complications.

  1. Calculate Accounts Receivable Balance. Calculating your accounts receivable balance can be a bit tricky, but you can do this. What you need to do is basically come up with the number for your accounts receivable balance and allowance in order to be able to make a determination if you are in fact in bad personal debt or not. This is done through the following steps. The first step is you must determine the set fiscal years or period that you wish to calculate. Once you have done that, establish the balance of the accounts receivable average write-off and ending. Then, you must divide the former with the latter in order to determine the average percentage between the two. After that, get the current ending accounts receivable and multiply that with the resulting percentage mentioned above.
  2. Set up account. Once you have finished calculating the accounts receivable balance, and the rest of the important numbers needed to help you account for the bad debt in your accounts receivable, you now need to try and set up an account with the help of an accountant in order to create an entry according to the calculations that you have made before hand. You need the help of an accountant for this particular task since you will need to perform this every year in order to get your numbers correctly and accurately.
  3. Get reviewed. As soon as this is finished, you will need to make a determination if you are still able to get extended some credit. Usually, if the cost for offering you credit is outweighed by the expense of your bad credit, then the management will basically review the process to determine if you are still eligible. Once you are deemed ineligible, a bill collector will then be assigned to collect your financial debt under debt laws.

Accounting for bad debts in accounts receivable can be difficult, but you can learn how to do it, especially if you want to keep track of your account. Keep yourself out of financial debt and bad debt by keeping your personal debt to a minimum.


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