Editing Accounts receivable (section)

== Bookkeeping ==
On a company's [[balance sheet]], accounts receivable are the money owed to that company by entities outside of the company. Accounts receivable are classified as [[current asset]]s 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 (accounting)|credit]] a revenue account. When the customer pays off their accounts, one debits cash and credits the receivable in the journal entry. The ending balance on the [[trial balance]] sheet for accounts receivable is usually a debit.

Business organizations that have become too large to perform such tasks by hand (or small ones that could but prefer not to do them by hand) will generally use [[accounting software]] on a [[computer]] to perform this task.

Companies have two methods available to them for measuring the net value of accounts receivable, which is generally computed by subtracting the balance of an allowance account from the accounts receivable account.

The first method is the '''allowance method''', which establishes a contra-asset account, ''allowance for doubtful accounts'', or ''bad debt provision'', which has the effect of reducing the balance for accounts receivable. The amount of the [[bad debt]] provision can be computed in two ways,  either (1) by reviewing each individual debt and deciding whether it is doubtful (a specific provision); or (2) by providing for a fixed percentage (e.g. 2%) of total debtors (a general provision). The change in the bad debt provision from year to year is posted to the bad debt expense account in the [[income statement]].

The allowance method can be calculated using either the income statement method, which is based upon a percentage of net credit sales; the balance sheet approach, which is based upon an aging schedule in which debts of a certain age are classified by risk, or a combination of both.

The second method is the ''direct write-off method''. It is simpler than the allowance method in that it allows for one simple entry to reduce accounts receivable to its net realizable value. The entry would consist of debiting a bad debt expense account and crediting the respective accounts receivable in the sales ledger. The direct write-off method is not permissible under [[Generally Accepted Accounting Principles]].

The two methods are not mutually exclusive, and some businesses will have a provision for doubtful debts, writing off specific debts that they know to be bad (for example, if the debtor has gone into [[liquidation]]).