How do I record an allowance for credit losses under CECL and then write off a customer?

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AcadiFi · Accepted Answer

Under CECL, the company estimates expected lifetime credit losses on receivables and records an allowance immediately, even before a specific account goes bad. The entry is bad debt expense and allowance for credit losses. Later, when a particular customer balance is deemed uncollectible, the write-off reduces both accounts receivable and the allowance. The write-off itself does not hit expense again because the loss was already estimated.

Example: Cedar Valley Supply has gross receivables of $500,000 at year-end. Based on aging, it expects 2 percent losses on current balances, 8 percent on accounts 31 to 60 days past due, and 25 percent on accounts over 60 days. The estimate comes to $18,000. If the allowance currently has a $5,000 credit balance, Cedar Valley records bad debt expense of $13,000 to bring the allowance up to $18,000. Two months later, a $6,200 customer account is written off with the entry allowance for credit losses $6,200 and accounts receivable $6,200.

The FAR trap is treating CECL like direct write-off accounting. Do not wait until a customer defaults to record the expected loss. Also, recoveries are handled separately by reinstating the receivable before recording cash. Keep the allowance account as the running estimate and write-offs as usage of that estimate. Practice more in our CPA FAR question bank.

How do I record an allowance for credit losses under CECL and then write off a customer?

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