Methods for measuring the net account receivables

There are two methods for measuring the net value of account receivables. The first method is the allowance method, which establishes a contra-asset account, allowance for doubtful accounts, or bad debt provision, that has the effect of reducing the balance for accounts receivable. The amount of the bad debt provision can be computed in two ways, either by reviewing each individual debt and deciding whether it is doubtful (a specific provision); or by providing for a fixed percentage of total debtors (a general provision). The change in the bad debt provision from year to year is posted to the bad debt expense account in the income statement.

Another method is the direct write-off method, which is simpler than previous method since it allows for one simple entry to reduce accounts receivable to its net realizable value. The entry would include debiting a bad debt expense account and crediting the respective account receivable in the sales ledger. The two methods are not mutually exclusive. Some businesses will have a provision for doubtful debts, writing off specific debts known to be bad.