Your next step is to review your customer accounts. These are part of Accounts Receivable, a balance sheet account, and will not be closed. You certainly want to be sure to carry over any balances not yet collected.

If you have any accounts that are more than 180 days past due, you may need to consider writing off the account. You can judge that by past business experience and decide at what point you give up on trying to collect. If you do have some customers whom you have given up on, you would write off the debt to a Bad Debts Expense account.

Some companies make this adjustment monthly, others do it yearly. Many decide to just write off a percentage of their Accounts Receivable accounts as bad debts based on historical experience with collecting their store charge accounts. Other companies actually identify the customer accounts they plan to write off and write off totals based on that assessment. We need to establish a new account for this called Bad Debts Expense (5225).

Whatever way you decide to record bad debt, your final adjustment for Accounts Receivable to recognize bad debt would be:

If you prepared this entry by using a percentage, you would not need to make specific entries in customer accounts. You would want to make specific entries in customer accounts if you developed this number by specifically identifying problem customers. Then you would want to note the write-off on the customer account information.

If you do receive payment on a specific account that was written off the prior year, then you would reverse the entry in this way.

After you’ve finalized your review of customer accounts, you should note your year-end balances, but the accounts will remain open and active for the next year.