Provision For Doubtful Debts / Allowance For Doubtful Accounts Journal Entry - An Income Statement-Approach To Calculate Allowance For Doubtful Accounts

Here we will study about Provision For Doubtful Debts Journal Entry or Allowance For Doubtful Accounts Journal Entry in Accounting.

You may also be Interested In, “What is A Debit Balance In Allowance For Doubtful Accounts”

What Are Allowance For Doubtful Accounts?

Allowance for Doubtful Accounts are an estimation on the Total Debts Due From Customers (Accounts Receivable). There are chances that few percentage of total debts may not be recovered from our customers, so it is better to makes an Allowance or Estimation or Provision on Accounts Receivable in order to carry on the business in a safe way and avoid unavoidable loss to the business.

Before Passing Accounting Journal Entry For Allowance For Doubtful Accounts, you must remember that:

1. While Making An Allowance on Accounts Receivable, The Accountant of the Company must consider Matching Principle of Accounting (GAAP) that revenues must be matched with all those expenses incurred in earning that revenues, so, Uncollectible Accounts Expenses is Created to match with Uncollectible Sales Amount For Goods or Services Sold to Customers On Account in the Current Accounting Period.

2. Uncollectible Accounts Expenses are different than Bad Debts Expense Account, because the Uncollectible Accounts Expenses are just an estimation on Accounts Receivable that some percentage of Total Debts Due From customers may not recover while Bad Debts are Debts that are actually not recovered from our customers.

Accounting Journal Entry For Allowances For Doubtful Accounts or Provision For Doubtful Debts

Example: A Retailer may make an Estimation of 5% On Net Sales Rs. 500000 (5% X 500000 = 5000) that it will not recover from his / her customers. Following Accounting Journal Entry is Passed:

Uncollectibel Accounts Expense a/c 5000

                                                       Allowance For Doubtful Accounts a/c 5000

(Recorded An Allowance or A Provision of 5% on Net Sales)

This approach is called Income Statement Approach as we calculate Allowance For Doubtful Accounts on Net Sales rather than on Accounts Receivable which is a Balance Approach or Accounts Receivable Aging Report.

Uncollectible Accounts Expense are Recorded in its ledger and finally closed and transferred to Profit And Loss Account or Income Statement On The Expense Side while Allowance For Doubtful Accounts are Recorded in its Ledger and then finally Closing Balance is deducted From Accounts Receivable In The Current Accounting Period on the Balance Sheet On The Asset Side Under The Head of Current Assets.

So, it is all about Allowance For Doubtful Accounts / Provision For Doubtful Debts Accounting Journal Entry.