Allowance for Uncollectible Accounts Receivables
Concept
Not all revenue generated from goods and services sold on “credit” or “acc
ount” will be
collected. Therefore, balances of open accounts must have a provision for uncollectibility to
estimate how much of those balances will actually be received. Under generally accepted
accounting principles, this is accomplished by establishing an allowance for uncollectible
accounts receivables (an offsetting, “contra-asset” account) that creates an allowance “reserve”
which nets against total accounts receivable. The net of total accounts receivable less the
allowance reserve balance results in a more realistic value of the asset.
Accounting
When an allowance for uncollectible accounts receivables is established or increased based on
revised estimates, bad debt expense is charged (debited) in the operating ledger and the
balance of the allowance for uncollectible accounts is increased (credited) in the general ledger.
Reductions of the allowance for uncollectible accounts receivables based on revised estimates
result in a decrease (debit) of the allowance balance and decrease (credit) of bad debt expense.
When a specific account becomes uncollectible, it is written off by charging the allowance for
uncollectible accounts and crediting accounts receivable. Writing off an account is only
permitted after all reasonable collection efforts (e.g., in-house, outside agency, state offset)
have failed and proper approvals are obtained.
Specific Banner account codes used to track balances of allowances for uncollectible accounts
receivables in the general ledger and bad debt expense in the operating ledger are:
• 53090 – Allowance for Uncollectible Accounts – Non-Banner System AR
• 53099 – Allowance for Uncollectible Accounts – Banner System AR
• 186100 – Bad Debt Expens
e
The effectiveness of collections and adequate provision for the allowance for uncollectible
accounts receivables must be reviewed, analyzed and calculated at least annually
at fiscal
yearend. For all receivables recorded in Banner AR, University Bursar performs this review,
analysis and calculation at the detail code level. Units using an approved non-Banner AR
system are required to maintain and record a reasonable estimate of an allowance for
uncollectible accounts receivable in the general ledger.
Calculation
The allowance for uncollectible accounts is calculated by multiplying the receivable balance in
the various aging categories (see table below) by a reserve rate. A higher reserve rate is applied
to older receivables because those receivables are less likely to be collected.