Accounting for Troubled Credit Card Receivables

by Eric Bank Google

When it comes to paying for shopping, consumers prefer credit cards to cash, according to The financial website points to a 2012 study by Javelin Research in which credit cards beat cash, 29 percent to 27 percent. If you are a merchant that doesn't issue your own credit card, you normally don’t have to deal with deadbeat credit card customers -- that’s the job of the credit card company. However, department stores, gas stations and many other merchants offer their own in-house credit cards, which might require special accounting for troubled receivables.

Credit Card Fees

Visa, MasterCard, American Express and the other credit card companies assume the risk for bad debts. As a merchant, you receive payment promptly, even if the customer fails to make good. However, you are on the hook for disputed charges, which you may have to repay to the credit card issuer if it sides with the consumer. In return for guaranteed payments, you must fork over a fee for each transaction, usually in the range of 1.5 to 3 percent, that helps to reimburse credit card companies for potential losses.

Bad-Debt Provision

If your company issues its own credit cards, you assume the risk of non-payment. Generally accepted accounting principles call upon you to recognize the loss from deadbeat users of your card in the period of the sale rather than the period of the write-off. To meet this requirement, you set up a contra-asset account entitled “provision for doubtful accounts.” If you specifically want to track losses from your credit card alone, you can have a provision account just for this category of loss. At the start of the period, estimate your expected period loss, which you debit to the bad debt expense account and credit to the provision account.


If, after a suitable waiting period -- usually 90 days -- you decide that a particular accounts receivable debt will not be forthcoming, you write off the account by debiting the provision for doubtful accounts and crediting accounts receivable. This removes the debt from your books without creating a current expense. The amount you allocate to your provision account can be based on your historical rate of bad debts or you can use the aging method to make a more precise estimate.

Accounts Receivable Aging

You age your accounts receivable by categorizing unpaid debts by the amount of time past due. For example, you might have categories for 30, 60 and 90 or more days. You then assign a percentage to each category that reflects the probability that you’ll have to write off the debt. At the end of the period, compare the expected aging losses with the balance in your provision for doubtful accounts and adjust it accordingly. For example, if your provision account has a credit balance of $1,000 but your aging estimate is $6,000, debit the bad debt expense account and credit the provision account for $5,000. You can set up multiple provision accounts to cover losses on store credit cards, bad checks and other credit arrangements.

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