ACCOUNTS RECEIVABLE: Recognition, Aging, Allowances

Accounts receivable represent amounts due from customers after a credit sale. They are recorded when goods are delivered or services are provided before payment is received.

Receivables are reported at their expected collectible amount and monitored by how long they’ve been outstanding. An allowance is used to reduce receivables for amounts expected to become uncollectible.

1. Recognition of Accounts Receivable

Accounts receivable are recorded when a company delivers goods or services under credit terms.

Recognition occurs at the point revenue is earned, regardless of when cash is received. This aligns with the accrual basis of accounting.

Receivables are typically classified as current assets unless payment is not expected within one year.

Initial recognition entry:

• debit Accounts Receivable

• credit Revenue

Example:

On August 5, a company provides consulting services worth $8,000 to a client on 30-day credit terms:

• debit Accounts Receivable ....................... 8,000

• credit Service Revenue ............................. 8,000

2. Aging of Accounts Receivable

The aging of receivables refers to grouping outstanding invoices by how long they’ve been unpaid.

This analysis helps:

• Assess credit risk

• Estimate bad debt exposure

• Support the allowance for doubtful accounts

Typical aging buckets:

• Current (0–30 days)

• 31–60 days

• 61–90 days

• Over 90 days

Aging schedule example (partial):

Customer	Current	31–60 Days	61–90 Days	>90 Days	Total
Alpha Co.	4,000	—	—	—	4,000
Beta Inc.	2,500	1,200	—	—	3,700
Delta Ltd.	—	—	3,000	2,000	5,000
Total	6,500	1,200	3,000	2,000	12,700

3. Allowance for Doubtful Accounts

Companies estimate uncollectible amounts and record an allowance to reduce AR to its net realizable value.

There are two common methods:

• Aging method: Estimate based on how long balances are outstanding

• Percentage of sales: Estimate based on historical collection trends

Entry to record estimated bad debts:

• debit Bad Debt Expense

• credit Allowance for Doubtful Accounts

Example: If 5% of a $12,000 AR balance is estimated to be uncollectible:

• debit Bad Debt Expense ............................ 600

• credit Allowance for Doubtful Accounts .... 600

This does not impact AR directly but reduces its net amount shown on the balance sheet.

Balance sheet presentation:

Accounts Receivable ............... $12,000

Less: Allowance ....................... (600)

Net Realizable Value ............ $11,400

4. Write-Offs and Recoveries

When a receivable is deemed uncollectible, it is written off against the allowance:

• debit Allowance for Doubtful Accounts

• credit Accounts Receivable

If recovered later:

1. Reinstate the receivable:

   • debit Accounts Receivable

   • credit Allowance

2. Record the cash:

   • debit Cash

   • credit Accounts Receivable

5. Disclosures

Financial statements must disclose:

• Total accounts receivable

• Allowance methods and assumptions

• Reconciliation of allowance activity

• Significant credit risks or concentrations

Key take-aways

• Record receivables when goods or services are delivered under credit terms

• Use aging to monitor payment delays and inform bad debt estimates

• Apply an allowance to present AR at expected collectible value

• Write-offs and recoveries affect the allowance, not new expense