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Doubtful Accounts - Q&A with Partner Brian Harris

Partner Brian Harris sheds light on questions regarding allowances for doubtful accounts in this in-depth article from The Financial Manager Magazine, provided by the Media Finance Manager Association.

Allowances for Doubtful Accounts

What method should be used to determine an allowance for doubtful accounts? Should it be done at the corporate level or by local media divisions, like TV stations or individual newspapers? Also, how do I determine when a receivable becomes a bad debt?

The calculation of the allowance for doubtful accounts consists of two parts. First, a “specific reserve,” which consists of those client balances that the company has determined are not likely to be collected.

The second part of an allowance consists of a “general reserve,” which represents an estimate of the balances that will not be collected. This amount is determined even though the company is not aware of any issues from its customers at the time of the calculation.

However, these customers may run into financial difficulties or require adjustments to their account and may not pay the full outstanding account balance due at the date of the financial statements.

The specific reserve should be calculated at the local level, as those employees will have the best knowledge  about customers’ financial difficulties or whether any are behind in making payments. The sales manager should review the accounts receivable detail ledger with each account executive and determine the status of each account. These individuals should determine whether the entire amount, a portion of the account, or specific invoices or charges will not be collected. Specific attention should be given to those balances outstanding more Read more >>