9 Accounts Receivable
NRV and the Allowance Method
Review of the Allowance Method
In this chapter we’ve explored the Allowance MethodAllowance Method:
The practice of maintaining an allowance for doubtful accounts contra-account to reduce A/R to its estimated collectible amount. See also: Allowance for doubtful accounts, A/R aging summary.. It uses the Allowance for Doubtful Accounts to reduce Accounts Receivable to its net realizable value.
A/R (gross) - Allowance for Doubtful Accounts (AFDA) = A/R (net)
In conclusion, let’s look at the components of allowance for doubtful accounts in a T-account format. This account gets bigger when its adjusted to its ending balance. This adjustment is a credit because Allowance for Doubtful Accounts is a contra-account. The account gets smaller when specific customer accounts are written off.
| Allowance for Doubful Accounts | |||
|---|---|---|---|
| DR | CR | ||
| decreases with write-offs | increases with adjustment to a calculated ending balance | ||
The journal entry to decrease AFDA looks like this:
| DR | AFDA | |||
| CR | A/R |
The journal entry to increase AFDA looks like this:
| DR | Bad Debt Expense | |||
| CR | AFDA |
Here’s one last example to put everything together.
Well done! You’ve reviewed sales transactions where customers purchase on account, and you’ve learned how to use the allowance method to measure A/R.
