A doubtful debt is an account receivable whose collection has become uncertain but which has not yet been established as uncollectible. It is the receivable itself, still sitting in the ledger at its full carrying amount, rather than the estimate written against it or the charge that estimate produces. When the doubt resolves and the balance is judged uncollectible, the same receivable becomes a bad debt.
Doubtful Debt Versus Bad Debt
Doubt is the whole difference. A doubtful debt is a balance the business is unsure it will collect. A bad debt is one it has concluded it will not.
Two authorities mark that line, one on each side of the books. For reporting, writeoffs are deducted from the allowance and recorded in the period in which the financial assets are deemed uncollectible (FASB Accounting Standards Update 2016-13, paragraph 326-20-35-8), so until that judgment is reached about a specific customer the receivable is still doubtful. For tax, a deduction is allowed for any debt which becomes worthless within the taxable year (26 U.S.C. 166), and what counts as evidence of worthlessness is worked through in how to read an accounts receivable aging report.
Where a Firm Identifies One
Nothing in the ledger flags a receivable as doubtful. The judgment happens during the close, and the standard splits it two ways. Expected credit losses are measured on a collective, or pool, basis when similar risk characteristics exist, and where a financial asset does not share risk characteristics with the others it is evaluated individually, in which case it should not also be included in a collective evaluation (FASB Accounting Standards Update 2016-13, paragraph 326-20-30-2).
In a firm’s close those two routes show up as the aging schedule and the specific-account review. The pool is usually built off the aging, one of several methods the standard permits for sizing the estimate, as allowance for doubtful accounts sets out. The individual route is the balance that has stopped behaving like the rest of the pool, pulled out and assessed on its own.
The Names It Travels Under
The receivable is doubtful; the account carried against it answers to several names. US accounting standards call that balance the allowance for credit losses (FASB Accounting Standards Update 2016-13, paragraph 326-20-30-1), the SEC’s balance sheet rule calls it an allowance for doubtful accounts (17 CFR 210.5-02), and why the older wording outlived the standard that renamed it is set out in allowance for doubtful accounts.
Provision for doubtful debts is the other label a US preparer runs into. It names the estimate rather than the receivable, and it is not the wording US accounting standards use.
Common Questions
A receivable in doubt, not an account in the ledger. Nothing is posted on the day a balance turns doubtful. The doubt surfaces only in the estimate made at the reporting date, and the balance keeps its full carrying amount in accounts receivable until it is written off.
There is no entry for a single doubtful debt. The estimate covering them is recorded at the reporting date by debiting bad debt expense and crediting the allowance, and that entry, the later write-off, and a worked example are all in allowance for doubtful accounts.
One is a judgment already made, the other a judgment still open. As account names on the books they are interchangeable, and allowance for doubtful accounts sets out why.
No. The deduction turns on a debt becoming worthless within the taxable year (26 U.S.C. 166), so an estimate of what a group of balances may do never reaches it, and what the return does allow is in bad debt expense.
Accountably places trained offshore accountants inside US CPA and EA firms, and a firm that wants to see the review standard on its own receivables work first can start with a trial task.
