Writing off customer accounts

One last thing. What happens when a customer fails to pay? We have to write-offWrite-Off:
To reduce the net book value of an asset to its net realizable value (NRV). See also: Impairment, Obsolescence. the customer’s account. Write-off just means that we reduce A/R (gross) for the amount the customer isn’t going to pay back. In this way, the accounting records reflect that the customer doesn’t owe us anymore.

For example, if Still Co. determines that CustomerA Ltd.can’t repay their $2,400 owing because they went bankrupt, Still needs to show $0 owing on CustomerA’s account. So we know the A/R (gross) balance goes down when accounts are written off. And A/R (gross) decreases with a credit.

But what is the debit in this journal entry? Although our first instinct may be to debit bad debt expense, that would be incorrect because we only use the Bad Debt expense account when we adjust Allowance for Doubtful Accounts. We record bad debt expense as an estimate of how much is not going to be collected, and Allowance for Doubtful Accounts is holding all the potentially uncollectible amounts until we can identify exactly which specific customer accounts won’t be paid back. Once we’ve identified a specific account (such as CustomerA), we can draw on the Allowance for Doubtful Accounts account like this:

Let’s write out the Statement of Financial Position presentation for A/R after the write-off:

Look - A/R (net) hasn’t changed! But A/R (gross) and Allowance for Doubtful Accounts have both decreased.

Now you might be thinking: what if a company receives cash from a customer unexpectedly? When receiving payment from a customer whose account has been written off, we simply reinstate that account then receive payment. For example, if Still receives $1,000 from CustomerA in a bankruptcy settlement, we’ll simply record a journal entry to reinstate the account for $1,000, then record the receipt:

You have recorded the second transaction, the cash receipt many times before. This is an increase in cash because Still is receiving money, and a decrease in Customer A’s receivable account. After these journal entries are recorded, the balance of Customer A’s account will be zero. This is appropriate because we don’t expect to receive any further cash from this bankrupt company.

Try writing off a customer's account, then check your work against the solutions. You’ve got this!

Give it a try, continuing from the Cissi example. Then check your work against the solutions. You’ve got this!

Well done! Great work!