3.0 - Direct Write-Offs

SUBJECT:

Direct Write-off Method for Non-Student Accounts Receivable

SOURCE:

Non-Student Accounts Receivable, Financial Management Services

DATE ISSUED:

December 2004

DATE OF LAST REVISION:

March 2019

ARSOP NO:

3.0

RATIONALE:

To account for uncollectible Non Student Accounts Receivables in the Kuali Financial Systems (KFS) Accounts Receivable module and external receivables solutions approved by Financial Management Services.

ARSOP:

Departments with an average accounts receivable less than $500 ,000 and all Non Reporting billing organizations are not required to record an Allowance for Doubtful Accounts. Rather, the direct write-off method may be used to record uncollectible accounts.

The direct method results in the write-off of an invoice directly to accounts receivable when it is deemed to be uncollectible. When the direct method is used an allowance for doubtful accounts is not set up to estimate future uncollectibles. Since the direct method does not conform to the matching principal and therefore is not in compliance with GAAP, this method should only be used when uncollectible invoices can be estimated to be an immaterial amount and the average accounts receivable balance is less than $500 ,000.

Recording a direct write-off:
An actual invoice must be eliminated from the detail of accounts receivable when all collection efforts have been exhausted by the department. Amounts over 12 months old lacking current productive activity are required to be written-off.

Writing off Kuali Financial System (KFS) Accounts Receivable Invoices:
Use the Customer Invoice Write-off (INVW) doc to clear the invoice. The INVW will increase Bad Debt Expense and reduce Accounts Receivable.

Example:

Units using Non-KFS Accounts Receivable Systems:

Accounts Receivables should be directly written-off in the unit’s external AR system and in KFS using an AVAD document.
Example: An auxiliary organization has an unpaid accounts receivable invoice over 12 months old for the amount $4,679.08:

Units using Non-KFS Accounts Receivable and recording accrual entries:

Units using accrual entries (AVAE documents) to accrue for Accounts Receivable that record Bad-Debt write-offs as above need to record the following additional adjusting entry using the AVAD document:

This entry re-establishes the original receivable and income. An omission will result in a credit receivables balance and no income. This entry should only be done once amount has been removed from Accounts Receivable, for non-KFS Accounts Receivable users.

Departments with a combination of KFS AR invoices and an allowance for doubtful accounts should create an AVAD to reduce Allow. for Bad Debt (Exp) and the Allowance for Doubtful Accounts upon writing off the KFS AR invoice.

Note: The allowance for doubtful accounts (contra asset) needs to be reduced as well by eliminating the allowance for bad debt expense amount.   Without adjusting the Allowance and the Allow. for Bad Debt (Exp), both would be overstated.

Units using KFS Accounts Receivable:
A direct write-off is accomplished via a Credit Memo using object code 5105.

Allowance Method:

Direct Method:

Collection Agency: Should the funds later be recovered via a Collection Agency, the entry to record the recovery of these funds is as follows for both KFS and Non-KFS Accounts Receivable users:  NOTE:  KFS Accounts Receivable users should not create a new invoice. Collection agency fees and charges are considered an expense of the unit generating the charges and should be charged to the appropriate object code—5110.

Writing-off a specific invoice using the Allowance Method:

An actual invoice must be eliminated from the detail of accounts receivable when all collection efforts have been exhausted by the department. Amounts over 12 months old lacking current productive activity are required to be written off. A debit (decrease) to Allowance for Doubtful Accounts and a credit (decrease) to Accounts Receivable must be made so the receivables balance is decreased appropriately.

Writing off Kuali Financial System (KFS) invoices:

Use an Invoice Write-off (INVW) doc to clear the invoice. The INVW will increase Bad Debt Expense and reduce Accounts Receivable. An AVAD should then be created to reduce Allow. for Bad Debt (Exp) and the Allowance for Doubtful Accounts.

Example:

Note: Both of these entries are necessary to increase bad debt expense and decrease AR.  The allowance for doubtful accounts (contra asset) needs to be reduced as well by eliminating the allowance for bad debt expense amount.   Without adjusting the Allowance and the Allow. for Bad Debt (Exp), both would be overstated.

Units with Non-KFS Accounts Receivable:

An invoice must be written-off within the organization’s internal AR system as well as in KFS via an AVAD document.

AVAD write-off entry for Non-KFS Accounts Receivable users:

** Some departments have a combination of KFS AR invoices and external AR system invoice. Those departments will have to make both the adjusting entries defined for KFS AR invoice write-offs and adjusting entries listed previously for Non-KFS AR write-offs. **

DEFINITIONS:

Aged Receivable Report as of June 30 should include customer name and outstanding balance, aged for current, 30, 60, 90, and 120 days. Report should be system generated by KFS accounts receivable or by accounts receivable system previously approved for use by Auxiliary Accounting in consultation with campus administration.

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 non-student 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:

Accrual Voucher Documentation

RESPONSIBLE

ORGANIZATIONS: 

All auxiliary units reporting non-student accounts receivable