How to Put a Reserve on a Receivable in Accounting

Reserves are now referred to as allowances or provisions.

In the past, receivables had reserves on their accounts for a percentage estimated to be uncollectible. The term "reserve" can appear to imply that a portion of cash has been set aside to cover the amount that is uncollectible, but that is not the case. The term was changed to "allowance" to avoid any misunderstanding and the account "Allowance for Uncollectible Accounts" was born. This is a contra asset account that reduces the amount of accounts receivable by a percentage estimated to be uncollectible.

Instructions

1. Estimate the amount of accounts receivable expected to be uncollectible for the accounting period. Use historical credit sales and uncollectible accounts information to determine a suitable percentage. Multiply that percentage by the accounts receivable balance to arrive at the estimated amount of uncollectible accounts for the current period.

2. Record a journal entry to post the estimate to the allowance for uncollectible accounts. Debit "Bad Debt Expense" and credit "Allowance for Uncollectible Accounts" for the amount you estimated in Step 1. The allowance account, which has a credit balance, is reported as a contra asset account and reduces the accounts receivable balance on the balance sheet. The adjusted receivables balance is the net realizable value of accounts receivable. The bad debt expense is reported on the income statement for the current accounting period.

3. Write off accounts when it is certain they are uncollectible. Do this by entering a journal entry that debits "Allowance for Uncollectible Accounts" and credits "Accounts Receivable". This eliminates the uncollectible amount from the allowance and the receivable accounts. An expense is not recorded at this time because the bad debt was already recognized at the time the allowance was set up or adjusted for current credit sales information.

References

• "Financial: CPA Exam Review"; DeVry/Becker Educational Development Corp.; 2009
• Accounting Coach: What is the provision for bad debts?

Resources

• Accounting Coach: What is The Allowance for Doubtful Accounts?