How Do You Account For Bad Debt With The Allowance Method?
Companies take a chance on consumers. When credit is extended to anyone, there’s some level of risk involved. Hopefully, for most companies, the risk is minimal. Reimbursement managers have to track the trend of bad debts to determine when the price is too high. They do this with the allowance method for writing off bad debts. There are key components to the process. Look at the history of all accounts within the business. At this point, it is crucial to determine what happens annually with write-offs. If the company traditionally writes 3 percent of its sales to bad debts, then 3 percent should play a major role in the allowance for current expenses. Set up an allowance account. This is called a contra account, and the accountant will be familiar with setting up and maintaining this account. Work with the accountant by showing the justification for the percentage that has been chosen. It shouldn’t require much haggling. Make adjustments based on actual write-offs. Hopefully, the major
