Writing off Uncollectible Accounts

When writing off an account as uncollectible, we essentially wash away the customer’s account balance with the Allowance for Uncollectible Accounts.

Up until deeming an account uncollectible, that customer’s account balance is stored in Accounts Receivable.

Think about it: Accounts Receivable stores customer payments on credit. In other words, it’s for purchases that customers make, but haven’t paid for yet. That’s why any uncollectible accounts still exist in Accounts Receivable.

Scenario: Your lemonade stand's sketchiest customer, Charles, lets the company know he won’t be able to pay off his account balance of $100. Record the write-off entry your lemonade stand should make.

The blue underlined text signals...

• When Charles lets us know he won’t be able to pay off his account balance... ➡️ This tells me we're going to be pulling out of our Allowance for Uncollectible Accounts for him.
• In doing so, we will no longer be receiving payment from him at a later date... ➡️ This means we'll pull his promised payment out of Accounts Receivable.

Uncollectible Amount = $100

The reason is...

• We are pulling from (-) of our allowance we set aside for accounts deemed uncollectible.
• That account is Allowance for Uncollectible Accounts.
• Which is a contra-asset account, and therefore has a normal credit balance.
• So, to decrease it by $100, we'll debit it.

The reason is...

• We are no longer going to receive (-) Charles' payment he promised to pay at a later date.
• This was represented through Accounts Receivable.
• Which is an asset account, and therefore has a normal debit balance.
• So, to decrease it by $100, we'll credit it.