How to Calculate Charge-Offs on a Trial Balance
Charge-offs are either debts gone bad, which may include provision for bad debts, or one-off charges representing extraordinary losses due to one-off events. Trial balances are documents that contain all the final account balances obtained from the general ledger and other ledgers. Preparers use trial balances to ensure that the amounts on the debit and credit sides of accounts are mathematically correct when preparing the income statement and statement of financial position. You cannot use a trial balance directly to calculate charge-offs for the year, but you can use the ledger accounts and general journal, from which you gather balances to calculate trial balances.
Other People Are Reading
Instructions
-
-
1
Locate the sales ledger control account to view the figure of charge-offs; this is the account where charge-offs are shown as a line item in the credit side of the sales account. Trial balances include balances drawn from control accounts, such as sales ledger control account and purchase ledger control account.
-
2
Use simple additions of the credit side and compare it with the total value of the debit side if the charge-off amount is missing in the control account. If there is a difference in the credit side, it is the amount of bad debts or charge-off for the year. Account for all other figures, such as discounts allowed, else your bad debt amount may be incorrect.
-
-
3
Locate the general journal and view the charge-offs account. The charge-off itself is an expense; hence, there must be an expense “T” account maintained in the General Journal. The closing balance figure, which is the balance carried forward at the credit of the account, gives the final figure which you get by writing off individual debtors accounts and summing it up at the debit side of the T account.
-
1
Tips & Warnings
Another way of arriving at the charge-off figure is through vetting of individual T accounts of all the customers. Given that some debtors regularly delay paying their balances, an amount is charged as an expense lost in the nonpayment of revenue. You will find this charged-off amount on the credit sides of the debtors’ accounts. Sum all the individual entries in the debtors’ account to arrive at the final figure of charge-offs for the year.
The T accounts, General Journal, control accounts and trial balance are all part of the basic double-entry bookkeeping and are essential conceptual and manual tools for maintaining transparent accounts.
References
Resources
- Photo Credit Comstock/Comstock/Getty Images
