Indiana University
Non-Student Accounts Receivable Standard Operating Procedures
SUBJECT:
Allowance for Doubtful Accounts and Write-offs for Non-Student Accounts Receivable
SOURCE:
Non-Student Accounts Receivable, Financial Management Services
ORIGINAL DATE OF
ISSUE:
December 2004
DATE OF LAST
REVISION:
January 2008
ARSOP NO:
2.0
RATIONALE:
To account for uncollectible receivables in accordance with Generally Accepted
Accounting Principles (GAAP). All revenue producing operations should establish and
use a method of bad debt recognition that includes establishing an Allowance for
Doubtful Accounts.
ASOP:
Allowance method
Direct write-off method
Recovery of write-offs
Collection Agency
Annual Reporting Requirements for write-offs
Allowance Method: Required for units with average accounts receivable greater than
$20,000, not including the allowance.
An Allowance for Doubtful Accounts measures receivables recorded but not expected
to be collected. Auxiliary organizations with average non-student accounts receivable
greater than $20,000, not including the allowance, must compute and record an
Allowance for Doubtful Accounts on their balance sheet. (This accounts receivable
balance should be re-evaluated on an annual basis to determine reporting status.)
Often, it is not known which specific accounts receivable invoices will be uncollectible.
An allowance is therefore established to estimate the value of those receivables
believed to be uncollectible. This entry should be recorded so the income statement
and balance sheet are fairly stated at the amount expected to be collected in
receivables, thus satisfying the matching principle1. The entry creates a contra
accounts receivable balance. When netted against the gross total of accounts
receivable, the true value of the receivables is reported, as illustrated by the sample
balance sheet below:
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Computing and recording an allowance: The following method is acceptable for
estimating the amount of bad debt to record each period:
Step A: Use the actual write-off amount of the previous year and divide it by total
credit sales in the same year. (If it has not been necessary to record write-offs on a
consistent basis, a unit can average the prior three years write-offs and divide by the
average credit sales for the same three years to arrive at an estimated allowance %.)
Note: Last year's write-off % becomes the estimated allowance %.
Step B: Multiply this percentage by the credit sales during the reporting period to find
the amount for the same period's bad debt entry.
Integrating the example, the correct entry is as follows:
AVAD
Allow. for Bad Debt (Exp)
Allow. for Doubtful Accounts
Object Code
5101
8900
Debit
$531.00
Credit
$531.00
Adjusting the allowance:
Your allowance for doubtful accounts must be reviewed for possible material
adjustment on a quarterly basis at minimum. No adjustment is necessary if there is no
material change in the estimated allowance value. We would also recommend that
your allowance be at least equal to the balance of outstanding invoices over 120 days
old.
Upon review of your Allowance for Doubtful Accounts the balance may be significantly
higher or lower than the actual amount of uncollectible invoices. In this case,
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adjustments must be made to the allowance account so a fair representation of
uncollectibles is shown.
Example: Allowance for Doubtful Accounts
$12,000
Estimated future uncollectible invoices $ 5,000
If $12,000 was the balance of Allowance for Doubtful Accounts at June 30th, and only
$5,000 of Accounts Receivable was estimated to be uncollectible in the future, the
allowance unfairly represents your future estimated uncollectible accounts. In this
case, a decrease to the Allowance for Doubtful Accounts balance and Allowance for
Bad Debt Expense is necessary.
AVAD
Allow. for Doubtful Accounts
Allow. for Bad Debt (Exp)
Example:
Object Code
8900
5101
Debit
$7,000.00
Allowance for Doubtful Accounts
Credit
$7,000.00
$5,000
Estimated future uncollectible invoices $8,000
If $5,000 was the balance of Allowance for Doubtful Accounts at September 30th, and
$8,000 of Accounts Receivable was estimated to be uncollectible in the future, the
allowance unfairly represents your future estimated uncollectible accounts. In this
case, an increase to the Allowance for Doubtful Accounts balance and Allowance for
Bad Debt Expense is necessary.
AVAD
Object Code
Debit
Allow. for Bad Debt (Exp)
5101
$3,000.00
Allow. for Doubtful Accounts
8900
Credit
$3,000.00
Writing-off a specific invoice using the Allowance Method:
An actual invoice must be eliminated from the detail of accounts receivable when all
collection efforts have been exhausted by the department. Amounts over 12 months
old lacking current productive activity are required to be written off. A debit (decrease)
to Allowance for Doubtful Accounts and a credit (decrease) to Accounts Receivable
must be made so the receivables balance is decreased appropriately.
Units using KFS Accounts Receivable: Use a Credit Memo and object code 8900 to
write-off specific invoices when the allowance method is being used. Reversal of the
invoice is not appropriate in this situation.
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Units using Non-KFS Accounts Receivable: An invoice must be written-off within their
internal system as well as in the KFS via an AVAD document.
Actual write-off entry for Non-KFS Accounts Receivable users:
Write off of invoice # BU0715008 dated 2/11/04 Customer XYZ483:
AVAD
Allow. for Doubtful Accounts
Accounts Receivable
Object Code
8900
8119
Debit
$4,679.08
Credit
$4,679.08
Direct Method: Optional for units with average accounts receivable balance less than
$20,000 and with prior approval from the campus.
The direct method results in the write-off of an invoice directly to accounts receivable
when it is deemed to be uncollectible. When the direct method is used an allowance
for doubtful accounts is not set up to estimate future uncollectibles. Since the direct
method does not conform to the matching principal and therefore is not in compliance
with GAAP, this method should only be used when uncollectible invoices can be
estimated to be an immaterial amount and the average accounts receivable balance is
less than $20,000.
Recording a direct write-off: An actual invoice must be eliminated from the detail of
accounts receivable when all collection efforts have been exhausted by the
department. Amounts over 12 months old lacking current productive activity are
required to be written-off.
Units using KFS Accounts Receivable:
A direct write-off is accomplished via a Credit Memo using object code 5105.
Units using Non-KFS Accounts Receivable:
Non-KFS Accounts Receivables should be directly written-off using an AVAD document
to 5105.
Example: An auxiliary organization has an unpaid accounts receivable invoice over 12
months old for the amount $4,679.08:
AVAD
Bad Debt Expense
Object Code
5105
Debit
$4,679.08
Credit
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Accounts Receivable
8119
$4,679.08
Units using Non-KFS Accounts Receivable and recording accrual entries:
Units using accrual entries (AVAE documents) to accrue for Accounts Receivable that
record Bad-Debt write-offs as above need to record the following additional adjusting
entry using the AVAD document:
AVAD
Accounts Receivable Sales & Services
Accounts Receivable
Object Code
8119
1500
Debit
$4,679.08
Credit
$4,679.08
This entry re-establishes the original receivable and income. An omission will result in a
credit receivables balance and no income. This entry should only be done once amount
has been removed from Accounts Receivable, for non-KFS Accounts Receivable users.
Recovery of write-off: Should funds be collected at a later date, the entry to record
the recovery of these funds is as follows for both KFS and Non-KFS Accounts Receivable
users is as follows.
NOTE: KFS Accounts Receivable users should not create a new invoice
Allowance Method:
To record the cash receipt:
Cash Receipt Document Entries:
Cash (Debit Entry)
Accounts Receivable (Credit Entry)
To recognize the effect on Allowance:
AVAD
Accounts Receivable
Allowance for Doubtful Accounts
Object Code
8000
8119
Object Code
8119
8900
Amount
$4,679.08
$4,679.08
Debit
$4,679.08
Credit
$4,679.08
Direct Method:
To record the cash receipt:
Cash Receipt Document Entries:
Other Income (Credit Entry)
Cash (Debited overnight – Do not enter)
Object Code
1800
8000
Amount
$4,679.08
$4,679.08
Collection Agency: Should the funds later be recovered via a Collection Agency, the
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entry to record the recovery of these funds is as follows for both KFS and Non-KFS
Accounts Receivable users: NOTE: KFS Accounts Receivable users should not create a
new invoice. Collection agency fees and charges are considered an expense of the unit
generating the charges and should be charged to the appropriate object code—5110.
To record the cash receipt and amount retained by the collection agency:
Cash Receipt Document entries:
Object Code
Amount
Collection Fees (Debit Entry)
5110
($1,403.72)
Other Income (Credit Entry)
1800
$4,679.08
Cash (Debited Overnight--Do not Enter)
8000
$3,275.36
Annual Reporting of Write-offs:
Per Indiana University Policy VI-80, all invoices written-off during the year must be
submitted and reported to Accounts Receivable on an annual basis for review by the
Board of Trustees.
Required Reporting:
All units must submit the following:
1. Total Credit Sales for the year
2. June 30 Aged Receivables Report
3. List and justification for retaining any accounts over 12 months old without
productive activity
4. Information detailing write-offs:
a. Customer name & address
b. Invoice number
c. Invoice date
d. Original invoice amount & remaining unpaid balance
e. Explanation of reason for write-off
DEFINITIONS:
Aged Receivable Report as of June 30 should include customer name and outstanding
balance, aged for current, 30, 60, 90, and 120 days. Report should be system generated
by KFS accounts receivable or by accounts receivable system previously approved for
use by Auxiliary Accounting in consultation with campus administration.
Average Accounts Receivable should represent the sum of the prior fiscal year's twelve
months accounts receivable balances divided by twelve.
Materiality should be set at a level at which a user of the financial statements would
not be influenced if this information were missing. Materiality should be agreed upon
with campus administration for each unit individually.
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Non-Student Accounts Receivable are charges billed outside of the bursar system to
students, as well as charges billed to external parties by the university for goods or
services.
Productive Activity is having a recent (within 30 days) promise to pay, in writing and
signed by the debtor, or a current payment plan in place on the account. Additionally,
Non-Student AR requires that all non-student payment plans have payment activity
within 90 days of the plan effective date of the payment plan, or within 90 days of the
invoice aging to 365 days old, unless otherwise stated in the terms and conditions of
payment plan.
CROSS REFERENCE:
Auxiliary Voucher Documentation
RESPONSIBLE
ORGANIZATIONS:
All auxiliary units reporting non-student accounts receivable
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"The matching principal means that revenues generated and expenses incurred in generating those revenues
should be reported in the same income statement. Revenues for an accounting period are recognized in
accordance with the realization principle. Then the expenses incurred in generating those revenues are
determined in accordance with the matching principle. Thus, expenses are reported in the income statement
for the accounting period in which the related revenues are recognized." (Intermediate Accounting, by
Chasteen, Flaherty, and O'Conner; 1992; McGraw-Hill, Inc.; p.60).
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