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The unearned premium reserve may have multiple roles under a deferral-matching accounting system. It may be viewed as a reflection of the refund liability in the event of policy cancellation10 . It may also be viewed as a way of deferring revenue so that revenue timing matches expense. These two views may result in different values, such as when a penalty would be charged the policyholder for early policy cancellation, although in practice such differences are generally ignored. Ideally the accounting system will clarify which view to use in quantifying the unearned premium reserve when the two. | THEME BAD DEBTS By John W. Day MBA ACCOUNTING TERM Bad Debt Bad debt in an accounting environment represents revenue from sales that were purchased on credit and or notes receivable that have proven uncollectible. FEATURE ARTICLE Recording Bad Debt Accrual and Cash If you offer credit to customers or loan money for business purposes you run the risk of not being able to collect all or part of it. It s just a fact of life. You might wonder why anyone would offer credit if there is a chance of not getting paid. The reason is that by offering credit there is a greater opportunity to acquire more sales. The increased sales should more than offset any bad debts. Bad debts can be attributed to more than just a few flaky customers. They can be a result of a poorly managed accounts receivable collection system. Therefore a business needs to make sure a good system is in place before offering credit. It is very disheartening to work hard for nothing. Depending on whether a business operates on a cash basis or an accrual basis dictates how the accounting for bad debts is handled and whether a tax deduction can be taken. If an accrual basis is being used then the accounting is set up like this When a credit sale is generated there is an increase debit to Accounts Receivable an asset account and a corresponding increase credit to a Sales a revenue account . For example DESCRIPTION DEBIT CREDIT Accounts Receivable 10 000 Sales 10 000 In this case it has been estimated that based on a few years of past history an average of five percent of all credit sales have proven worthless. Five percent of 10 000 is 500. Therefore a contra-account is needed to offset the accounts receivable account. In accrual accounting this account is called Allowance for Doubtful Accounts or Reserve for Doubtful Accounts . It is usually located next to the accounts receivable account so one can see how much is expected to not be collected. DESCRIPTION DEBIT CREDIT Bad Debt Expense 500 Allow Doubtful .
