Indiana University

Non-Student Accounts Receivable Standard Operating Procedures

SUBJECT: Allowance for Doubtful Accounts for Any Department/Unit

SOURCE: Non-Student Accounts Receivable, Financial Management Services

DATE ISSUED: December 2004

DATE OF LAST March 2019

REVISION:

ARSOP NO: 2.0

RATIONALE: To account for uncollectible receivables in accordance with Generally Accepted

Accounting Principles (GAAP). All departments/units with an average Accounts
Receivable balance of $500,000 or greater should establish and use a method of bad
debt recognition that includes establishing an Allowance for Doubtful Accounts.

ARSOP: All departments are required to calculate an Allowance for Doubtful Accounts to be
submitted to Auxiliary Accounting each fiscal year with their Balance Sheet Backup.
Only those departments with an average accounts receivable greater than $500,000
are required to record an entry for their Allowance for Doubtful Accounts.

An Allowance for Doubtful Accounts is a contra asset account (meaning it either has a
credit or zero balance) on the balance sheet that reduces the total receivables
reported as collectible. Departments with average non student accounts receivable
greater than $500,000, not including the allowance, must compute and record an
Allowance for Doubtful Accounts on their balance sheet. The accounts receivable
balance should be re-evaluated on an annual basis to determine whether or not an
entry must be recorded. Often, it is not known which specific accounts receivable
invoices will be uncollectible. An allowance is therefore established to estimate the
value of those receivables believed to be uncollectible. This entry should be recorded
so the income statement and balance sheet are fairly stated at the amount expected
to be collected in receivables, thus satisfying the matching principle1. When netted
against the gross total of accounts receivable, the true value of the receivables is
reported.

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 SAMPLE AR TOTAL SHOWN ON BALANCE SHEET:

OBJECT NAME OBJ THRU JUN 30

CODE

Accounts Receivable 81xx 550,000.00

Allowance for Doubtful Accounts 89xx (42,000.00)

Total Accounts Receivable Balance (which will 508,000.00

show up on the financial statements)

Computing and recording an allowance:

A three-year write-off percentage average should be computed to determine the

amount recorded for the Allowance for Doubtful Accounts. Calculating the allowance
based solely on the prior fiscal year write-off percentage does not adequately predict
future write-offs if the prior year write-off percentage is atypical. A three year
average balances an atypical year with normal write-off percentages, which better
represents write-off trends. Once the three year average percentage has been
calculated, the percentage is then multiplied by the current year’s Accounts
Receivables balance to establish the new fiscal year’s allowance amount.
Organizations that do not have three years of data should make their allowance
equal to their receivables balance greater than 120 days, unless otherwise approved
by Financial Management Services.

Step A: Divide the prior three fiscal years write-off amounts by the same years’
accounts receivable balances.

Example:

Total Write-offs FY 2015 12,000.00

Total Accounts Receivable FY 2015 435,250.00
2.76% % of Write-offs

Total Write-offs FY 2016 35,000.00

Total Accounts Receivable FY 2016 435,250.00
8.04% % of Write-offs

Total Write-offs FY 2017 16,500.00

Total Accounts Receivable FY 2017 450,350.00
3.66% % of Write-offs

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Note: The percentage of write-offs for FY 2016 is unusually high compared to FY 2015
and FY 2017. FY 2017’s allowance amount would have been much higher if it was
based on the prior year’s atypical write-off percentage.

Step B: Add all three years’ write-off percentages and divide the sum by three.

Example:

FY 2015 Write-off % 2.76%

FY 2016 Write-off % 8.04%
FY 2017 Write-off % 3.66%
14.46%

Sum of %'s 14.46%

Number of years 3
Average write-off % 4.82%

Step C: Multiply the average percentage calculated in Step B by the current year’s
outstanding receivables balance to get the allowance amount for the new fiscal year.

Example:

Total Accounts Receivable FY 2017 450,350.00

X 4.82% Average write-off %
21,710.19 FY 2018 Allowance Amount

Integrating the example, the correct AVAD entry is as follows:

AVAD Object Debit Credit

Code
Allow. for Bad Debt (Exp) 5101 $21,710.19
Allow. for Doubtful Accounts 89xx $21,710.19

Adjusting the allowance:

The allowance for doubtful accounts must be reviewed for possible material
adjustments on an annual basis at minimum. An adjustment is not necessary if there
is no material change in the estimated allowance value. It is recommended that the
allowance be at least equal to the balance of outstanding invoices over 120 days old.

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Upon review of your Allowance for Doubtful Accounts the balance may be
significantly higher or lower than the actual amount of uncollectible invoices. In this
case, adjustments must be made to the allowance account so a fair representation of
uncollectible receivables is shown. Adjustments can be made manually to increase
the allowance if there are specific situations that individuals are aware that may
cause collection issues.

Example:

Allow. for Doubtful Accounts Balance $21,710.19

Estimated future uncollectible invoices $14,250.00

If $21,710.19 was the balance of Allowance for Doubtful Accounts at June 30th, and
only $14,250.00 of Accounts Receivable is estimated to be uncollectible in the future,
the allowance unfairly represents your future estimated uncollectible accounts. In
this case, a decrease to the Allowance for Doubtful Accounts balance and Allowance
for Bad Debt (Exp) is necessary.

Allow. For Doubtful Accounts Balance 21,710.19

Est. future uncollectible invoices (14,250.00)
7,460.19 Adjustment Amount

AVAD Object Debit Credit

Code
Allow. for Doubtful Accounts 89xx $7,460.19
Allow. for Bad Debt (Exp) 5101 $7,460.19

If at September 30th, the estimated balance of uncollectible invoices increases to

$18,000.00, an increase to the Allowance for Doubtful Accounts balance and
Allowance for Bad Debt Expense is necessary.

Est. future uncollectible invoices 18,000.00

Allow. For Doubtful Accounts Balance (14,250.00)
3,750.00 Adjustment Amount

AVAD Object Debit Credit

Code

Allow. for Bad Debt (Exp) 5101 $3,750.00

Allow. for Doubtful Accounts 89xx $3,750.00

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 Exceptions to this standard operating procedure require the approval of the
Controller, Chief Accountant or Director of Non-Student Accounts Receivable

DEFINITIONS: Average Accounts Receivable should represent the sum of the prior fiscal year's
twelve months accounts receivable balances divided by twelve.

Materiality should be set at a level at which a user of the financial statements would
not be influenced if this information were missing. Materiality should be agreed upon
with campus administration for each unit individually.

Non-Student Accounts Receivable are charges billed outside of the bursar system to
students, as well as charges billed to external parties by the university for goods or
services.

Productive Activity is having a recent (within 30 days) promise to pay, in writing and
signed by the debtor, or a current payment plan in place on the account. Additionally,
Non-Student AR requires that all nonstudent payment plans have payment activity
within 90 days of the plan effective date of the payment plan, or within 90 days of the
invoice aging to 365 days old, unless otherwise stated in the terms and conditions of
payment plan.

CROSS REFERENCE: ARSOP 1.0: Non Student Accounts Receivable

ASOP 2.0: Definition of a Reporting Auxiliary & Service Center
ASOP 44.0: Balance Sheet Backup for Year-End

RESPONSIBLE
ORGANIZATIONS: All Reporting Auxiliary and Service Centers

1"The matching principal means that revenues generated and expenses incurred in generating those revenues
should be reported in the same income statement. Revenues for an accounting period are recognized in
accordance with the realization principle. Then the expenses incurred in generating those revenues are
determined in accordance with the matching principle. Thus, expenses are reported in the income statement
for the accounting period in which the related revenues are recognized." (Intermediate Accounting, by
Chasteen, Flaherty, and O'Conner; 1992; McGraw-Hill, Inc.; p.60).