Procedure No. 609.1
Area: Finance
Proposed: 4/22/08
Adopted: 4/22/08
Revised: 5/14/24
Recording Bad Debt Expense
CALCULATE ALLOWANCE FOR DOUBTFUL ACCOUNTS
The allowance method attempts to identify a bad debt expense in the same period as the recorded revenue to obtain a timely recognition of the potential bad debt expense. Although estimates are involved in the allowance method, the percentage of receivables that will not be collected can be estimated from past experience, present conditions, and an analysis of the outstanding balances.
1. Review the aged accounts receivable listing for balances that are specifically identifiable as credit risks or uncollectible. These balances should become part of the allowance amount.
2. For the remaining balances, estimate any additional allowances required. This is a process of judgmental analysis to assign a collectibility factor, for example:
• Percentage reserve on balances for the current fiscal year
• Percentage reserve on balances for the prior fiscal year
DOCUMENTATION
3. Documentation held on file in the Finance Department should support the balance of allowance for doubtful accounts. This documentation should include support as to why it may be uncollectible, or in the case of Step 2, above, any supporting analysis and calculations.
ADJUST GENERAL LEDGER
4. Calculate the total of the estimated allowance amounts and compare it with the general ledger allowance account balance. The allowance general ledger account should be adjusted at year-end to reflect the current year’s calculated allowance amount and be supported with sufficient documentation for audit purposes. Adjust the allowance and bad debt expense accounts in the general ledger.
The student sub-ledger is not adjusted. Year-end adjustments made directly to the general ledger student accounts receivable are for reporting purposes only and are reversed in the following year to maintain the ability to reconcile the general and subsidiary ledgers.
CANCELING ACCOUNTS RECEIVABLE
5. Identify accounts that are truly uncollectible and should be written off. This is not a routine activity, and is done primarily when legally required.
A clear distinction must be made between canceling accounts receivable and writing off accounts receivable. Accounts receivable can be canceled or adjusted when 1) the institution is not entitled to collect the money, or 2) the debtor qualifies for a waiver, approved extenuating circumstance or refund. Accounts receivable must not be canceled to avoid write-off procedures. The Bursar’s Office is responsible for canceling student accounts receivable and maintaining proper supporting documentation. Cancellation of student accounts receivable is adjusted in the student sub-ledger.
RECOVERY OF BAD DEBTS WRITTEN OFF
6. Payments received on accounts in the allowance should be recorded as normal payments in the accounts receivable sub-ledger.
INTERNAL CONTROLS
7. The allowance for bad debt is presented in the annual comprehensive financial report. The methodology for writing off uncollectible accounts is disclosed in the footnotes to the financial statements. External auditors annually review the calculation, and ending balance of the allowance for doubtful accounts, for appropriateness and completeness.