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The doubtful debt reserve holds a sum of money to allow a reduction in the accounts receivable ledger due to non-collection of debts. This can also be referred to as an allowance for bad debts. Once a doubtful debt becomes uncollectible, the amount will be written off. [4]
Accounts receivable are classified as current assets assuming that they are due within one calendar year or financial year. To record a journal entry for a sale on account, one must debit a receivable and credit a revenue account. When the customer pays off their accounts, one debits cash and credits the receivable in the journal entry.
The allowance is a topic of much regulatory scrutiny, and a review of the ALLL methodology is a significant portion of a financial institution's safety and soundness exam because it is important for federal bank examiners to ensure that an institution has a sufficient amount of capital in the allowance reserve.
IAS 37 establishes the definition of a provision as a "liability of uncertain timing or amount", and requires that all the following conditions be fulfilled before a provision can be recognized: the entity currently has a liability as a result of a past event; an outflow of resources is likely to be needed to settle the liability; and
The recording of the liability in the entity's balance sheet is matched to an appropriate expense account on the entity's income statement. In U.S. Generally Accepted Accounting Principles (U.S. GAAP), a provision is an expense. Thus, "Provision for Income Taxes" is an expense in U.S. GAAP but a liability in IFRS.
Likewise, in the liability account below, the X in the credit column denotes the increasing effect on the liability account balance (total credits less total debits), because a credit to a liability account is an increase. All "mini-ledgers" in this section show standard increasing attributes for the five elements of accounting.
Current liabilities – these liabilities are reasonably expected to be liquidated within a year. They usually include payables such as wages , accounts , taxes , and accounts payable , unearned revenue when adjusting entries , portions of long-term bonds to be paid this year, and short-term obligations ( e.g. from purchase of equipment).
These liabilities are typically settled using current assets or by incurring new current liabilities. Key examples of current liabilities include accounts payable, which are generally due within 30 to 60 days, though in some cases payments may be delayed. Current liabilities also include the portion of long-term loans or other debt obligations ...