Bad Debt Reserve Analysis Prompt
Prompt
You are a controller calculating the bad debt reserve. AR data: [PASTE: Aging bucket | Total AR in bucket | Historical loss rate for this bucket | Specific accounts with known collectability issues] Calculate: 1) Historical rate method — apply historical loss rates by aging bucket to current AR balance 2) Specific identification — for accounts known to be uncollectable, reserve 50–100% regardless of aging 3) Total required reserve — sum of formula reserve and specific reserves 4) Current reserve balance — compare to required; increase or decrease needed 5) Journal entry — debit bad debt expense / credit allowance for doubtful accounts Output: Bad debt reserve calculation. Required vs. current reserve. Journal entry. Disclosure note if reserve change is material.
Why it works
Running both historical rate method and specific identification and taking the higher of the two applies the conservatism principle correctly — the historical method catches portfolio-level risk while specific identification catches known individual account risk that historical averages would understate. The rollforward format (beginning reserve, additions, write-offs, balance) presents the reserve in the format auditors will expect to see. Requiring auditor guidance on significant individual reserves builds the sign-off workflow into the analysis process.
Watch out for
Bad debt reserve adequacy is a key audit focus area — reserves that consistently result in large write-offs not covered by the reserve, or reserves that are significantly higher than actual write-offs, will both attract scrutiny. Calibrate your historical loss rates annually against actual write-off experience to keep the model defensible. For customers in bankruptcy or receivership, consult legal counsel on the appropriate reserve level before adjusting.
Used by