Division of Financial Affairs

20/7/2020 Allowance for Doubtful Accounts and Bad Debt Expenses | Cornell University Division of Financial Affairs

Accounting

Allowance for Doubtful Accounts and Bad

Debt Expenses
An allowance for doubtful accounts is considered a “contra asset,” because it
reduces the amount of an asset, in this case the accounts receivable. The
allowance, sometimes called a bad debt reserve, represents management’s
estimate of the amount of accounts receivable that will not be paid by customers. If
actual experience differs, then management adjusts its estimation methodology to
bring the reserve more into alignment with actual results.

In accrual-basis accounting, recording the allowance for doubtful accounts at the

same time as the sale improves the accuracy of financial reports. The projected bad
debt expense is properly matched against the related sale, thereby providing a
more accurate view of revenue and expenses for a specific period of time. In
addition, this accounting process prevents the large swings in operating results
when uncollectible accounts are written off directly as bad debt expenses.

Units should consider using an allowance for doubtful accounts when they are
regularly providing goods or services “on credit” and have experience with the
collectability of those accounts. The following entry should be done in accordance
with your revenue and reporting cycles (recording the expense in the same
reporting period as the revenue is earned), but at a minimum, annually.

DR Bad Debt Expense

CR Allowance for Doubtful Accounts

Object
Object Code
Code Name Description

https://www.dfa.cornell.edu/accounting/topics/revenueclass/baddebt 1/2
20/7/2020 Allowance for Doubtful Accounts and Bad Debt Expenses | Cornell University Division of Financial Affairs

Object
Object Code
Code Name Description

6330 Bad Debt Write off of uncollectable Accounts Receivable.

Expense Use: Use with approval from the Division of Financial Affairs

1250 Allowance Allowance for Doubtful Accounts is a contra current asset obj
for code associated with A/R. When the allowance object code is
Doubtful used, the unit is anticipating that some accounts will be
Accts uncollectible in advance of knowing the specific amount.
Use: Units billing sales to external customers where the
possibility of default exists. The allowance normalizes fund
balance activity.

When it is determined that an account cannot be collected, the receivable balance

should be written off. When the unit maintains an allowance for doubtful accounts,
the write-off reduces the outstanding accounts receivable, and is charged against
the allowance – do not record bad debt expense again!

DR Allowance for Doubtful Accounts

CR Accounts Receivable

For detailed expectations and guidelines related to write offs, see Writing Off
Uncollectable Receivables.

https://www.dfa.cornell.edu/accounting/topics/revenueclass/baddebt 2/2