Accounts receivable balances are subject to valuation risks and what’s more, subject to the question whether they are collectible or not. At every balance sheet date, you should ask yourself if there are any indications that the balances are not recoverable in the amount they’re recognized on your balance sheet.

If the answer to the question is “no” as in you have no reason to believe your client will not pay up its debt in full, you don’t have to do anything. However, if the answer is “yes”, there are two further considerations to be made. In the case where there’s doubt whether the client is capable of paying at all as in it’s in bankruptcy or some such serious financial difficulties, the receivable may be better to be written off the balance sheet. However, with this post we are focusing on the second case, where the client is just facing some financial difficulties, which result them just not meeting the payment terms every now and then and possibly only paying partially more often than normal.

In the latter case you just write down the amount you predict that’s not recoverable within a reasonable and agreed timeframe. By “agreed” we do mean a period that’s close to the contractual payment term more or less.

The entries you do are the following (with credit you create / increase an allowance account under accounts receivables and with the debit you add an expense to your income statement):

Db Expense from increasing the allowance for doubtful receivables
Cr Allowance for doubtful receivables

With this you have now created an allowance account (or increased it), which means that you still have the receivable balance in your ledger in the full amount, but since under the accounts receivables you’ve also created a sub account, which decreases the balances, you have now recognized the accounts receivable in their recoverable amount.