340 Allowance for Doubtful Accounts

Liabilities

Contra Assets

Synopsis

Account 340 is established to record the reserve for bad debts.

Debits

Credits

  1. Customer receivables being written off as uncollectible

  2. Monthly decrease of the provision to equal total customer receivables over 90 days past due

  1. Establishment of the provision to equal total customer receivables over 90 days past due

  2. Monthly increase of the provision to equal total customer receivables over 90 days past due

  3. Amounts owed by customers who have become insolvent, regardless of the age of the account

 

Example 1

Record the adjustment $4,409 which is necessary to establish the allowance for customer receivables over 90 days past due.  The bad debt expense is pro-rated to each department as shown in the example below.

Journal: Standard Entries Journal

Entry:

 

Debit

Credit

Account 057-01

Bad Debt Expense – New Vehicle Department

$1,500

 

Account 057-02

Bad Debt Expense – Used Vehicle Department

$750

 

Account 057-05

Bad Debt Expense – Mechanical Department

$685

 

Account 057-06

Bad Debt Expense – Body Shop Department

$1,250

 

 

Account 057-07

Bad Debt Expense – Parts & Accessories Department

 

$224

 

Account 340

Allowance for Doubtful Accounts

 

$4,409

Comments

A credit balance represents the provision for possible losses on uncollectible customer notes and accounts receivable.  All receivables should be aged and collection efforts should be intensified, as debts get older. Professional advice should be obtained regarding items that remain uncollectible and the tax deduction status of accounts being written off.