AR Write-Offs
I have been doing some research and looking through the guides, watching videos etc... and am still confused on accounts receivable write-offs, bad debt expenses and allowance for doubtful accounts.
It seems like some companies have allowances while others do not. If you have an allowance, does that mean you don't have any bad debt expense and thus no IS impact when a receivable is not collectible?
Can someone explain the differences and how it would impact the 3 financial statements with and without an allowance for doubtful accounts. Thanks!!!
A provision for doubtful accounts it just that, a provision (non-cash) estimated based on historical non-collectable accounts. Companies who do not have such a provision will periodically write-off AR, which can whipsaw earnings in a stub period.
Virtually all companies have some form of bad debt. Incorporating a provision is merely a tactic to smooth earnings. I am not 100% on the actual tax implications for doubtful accounts provisions, but since it is used as a proxy for actual bad debt, I treat it as a tax deductible expense.
IS - contra revenue/bad debt expense of $10 -> NI decreases $6 CF - add-back $10 under operating activities (non-cash item), cash is up $4 BS - Cash up $4, net AR down $10 and retained earnings down $6
be sure your net AR formula is calculating correctly
Does that clear things up?
Thanks for the response Brosef!
I guess where I am still confused is whether the example you provided is the direct write-off method or the allowance method or if from a financial statement impact there is no difference?
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