When an organization creates an allowance for doubtful debts, the loss is already foreseeable in the company’s financial statements. This helps them to prepare for the foreseeable loss in advance. It helps the company to reasonably estimate the amount that would be declared as uncollectible from the customers.
See also Sold Merchandise Journal Entry: What is the Cost of Merchandise Sold? And How to Record It Once the business has been in operation for a considerable time frame, they can reasonably estimate the percentage of collectibles, which might not honor their debt. In accordance with the prudence concept in accounting, accountants are supposed to prepare in advance for any unforeseeable losses. However, it depends on the organization in context and the amount of credit sales they have.Īllowance for Doubtful Debts and Prudence Concept It can be seen that both these methods are equally acceptable by companies.
Method 1: Using allowance for Doubtful Debts.In other words, the Accounts Receivable Write-Off is the process that reflects the fact that the amount can no longer be collected from the suppliers, and hence, it needs to be written off the books.Īccounts Receivable Write-Off takes place only when there is relative certainty that the customer would not pay back the amount, and therefore, it does not make sense to continue recording it as a Current Asset on the financial statement.Īccount Receivable Write-off can take place using two approaches: What is meant by Accounts Receivables Write-Off?Ī write-off of accounts receivables is the action taken by accountants to eliminate the balance from a particular customer’s account due to the inability to the collection of the accounts. This results in bad debt for the company, and hence, needs to be reflected in the company’s financial statements. However, there are instances where a customer defaults and is unable to pay back the amount to their suppliers. Normally, customers do pay back their dues.
When businesses sell on credit, they create Accounts Receivables, which include all the details regarding the amount that is due from customers. During the normal course of business, it is regular for businesses to sell goods on credit.