Open receivables must have a provision for uncollectibility to estimate a realistic value of the receivable asset. Under generally accepted accounting principles, this estimate is made by establishing an allowance for uncollectible accounts receivable. This allowance is a "contra-asset reserve" (allowance reserve), which nets against total accounts receivable.
Accounting
When the allowance reserve is established or increased based on revised estimates, bad debt expense is debited in the operating ledger, and the allowance reserve is credited in the general ledger. When the allowance reserve is decreased based on revised estimates, bad debt expense is credited in the operating ledger, and the allowance reserve is debited in the general ledger. After exhausting all collection efforts and obtaining proper approval, specific receivables are deemed uncollectible and written off by debiting the allowance reserve and crediting accounts receivable.
The Banner account codes used to track bad debt expense in the operating ledger and allowance reserve in the general ledger are:
- 186100 - Bad Debt Expense
- 53099 - Allowance Reserve for Receivables Recorded in Banner AR
- 53090 - Allowance Reserve for Receivables not Recorded in Banner AR, i.e., receivables with an approved Banner AR Exemption on file (see University of Illinois System Business and Financial Receivables Policy section 5.5)
Calculation
The effectiveness of collections and adequate provision for the allowance reserve must be reviewed, analyzed, and calculated at least annually at fiscal year-end. University Bursar performs this function at the detail code level for all receivables recorded in Banner AR. Units with an approved Banner AR exemption are required to record and maintain their own reasonable allowance reserve in the general ledger.
The allowance reserve is calculated by multiplying the open receivable balances in various aging categories by a corresponding reserve rate for each aging category. Higher reserve rates are applied to older receivables because those receivables are less likely to be collected. As the dollar amount of open receivables increases or decreases each year, the corresponding allowance reserve and bad debt expense are adjusted accordingly. In addition, the reserve rates used in the allowance calculation are reviewed annually and adjusted as necessary. Reserve rates are developed and refined based on the actual collection history of a particular operation.
Contact
For more information, or if you have questions, please email University Bursar at BursarBusOps@uillinois.edu.
