Accounts receivable losses and bad debt provision

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The accounting treatment of outstanding receivables, which are certain to default and those where the default is uncertain, is different. This leads to a distinction between debtor losses and allowances for doubtful accounts.

Debtor losses represent defaults in receivables in accounting. These occur particularly through customers who do not pay or do not pay on time. Depending on whether the loss is finally occurred or is still expected in the future, the accounting treatment is different.

Final Loss

‍Occurs when the insolvent customer (debtor) and the loss incurred are known. The amount of the receivable is written off directly through the asset account "Debtors" and the expense account "Debtor Losses" at the time of the loss.

Journal Entry:

Debtor Losses / Debtors

Presumed Loss

‍For certain debtors (open customer invoices), the receipt of payment is uncertain. At the end of an accounting period, the existing risk of loss is estimated and written off indirectly via the contra asset account "Allowance for doubtful accounts" and the expense account "Debtor Losses".

Journal Entry:

Debtor Losses / Allowance for Doubtful Accounts

The allowance for doubtful accounts represents a valuation adjustment to the debtors' account, which is why it is also called "Allowance Debtors". Since it is a contra asset account, it is subject to the same booking rules as a liability account.

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