Provision of Doubtful debts and bad debt expense is an important estimate in every business. For service Industry like health care or hospital Industry, this provision needs to be calculated with special care. Accounting Standards Update No 2011-07, Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts of Certain Health Care Entities were developed to clarify the presentation of the provision for bad debts and related allowance for doubtful accounts and ultimately provide better transparency to users of the financial statements of health care entities. Calculation of reserve for doubtful debts and bed debt expense Reserve/Provision of Bad debt is an estimate of non recovery of Account receivable. In Accounting, an Provision is created on the basis of best possible estimate for the non recovery of amount due to some Debtors. Hospitals recognize revenue upon completion of the performance of its services. In order to standardize billing, the hospital will bill, and thus recognize, a gross amount of revenue (which is not presented on the income statement). Such gross billing and revenue recognition is based on the list price of the services – an amount the hospitals and the companies seldom, if ever, anticipate receiving. On the income statement, the hospital or company presents net revenue which is composed of the gross revenue amount less a “contractual allowance reserve”. Generally, the contractual allowance reserve represents the Company’s estimate, based on its payors’ history, of the gross list revenue which the hospital or company does not expect to collect. Thus, revenue is presented on the income statement at the estimated net realizable amount from patients, third-party and government payors, and others. In addition, accounts receivable are also presented net of the contractual allowance reserve, indicating the net realizable value of the accumulated revenue recognized. The resulting accounts receivable balance is also netted against a bad debt reserve (allowance for doubtful accounts) which relates to the actual amount the Company believes it will collect in cash from the receivable. Since the initial contractual allowance has already been taken out of the receivable balance, the allowance for doubtful accounts primarily relates to the portion of the account that must be paid by the individual as well as uninsured accounts. Example of Presentation of Allowance of doubtful debts and Bad debt expense Income Statement Gross Revenue 200 Less: Contractual Allowance Reserve (10) Net Revenue 190 COGS (100) SG&A (20) Taxes (20) Net Income 50 Balance Sheet Gross Accounts Receivable 200 Less: Contractual Allowance Reserve (10) Less: Allowance for Doubtful Accounts ( 5) Net Accounts Receivable 185 Prior Period Allowance for Doubtful Accounts 4 Plus: Additions to Provision for Bad Debts 6 Less: Write-offs (5) Current Period Allowance for Doubtful Accounts 5 Solution Provision of Do.

1. Provision of Doubtful debts and bad debt expense is an important estimate in every business. For
service Industry like health care or hospital Industry, this provision needs to be calculated with
special care.
Accounting Standards Update No 2011-07, Presentation and Disclosure of Patient Service
Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts of Certain Health
Care Entities were developed to clarify the presentation of the provision for bad debts and related
allowance for doubtful accounts and ultimately provide better transparency to users of the
financial statements of health care entities.
Calculation of reserve for doubtful debts and bed debt expense
Reserve/Provision of Bad debt is an estimate of non recovery of Account receivable. In
Accounting, an Provision is created on the basis of best possible estimate for the non recovery of
amount due to some Debtors.
Hospitals recognize revenue upon completion of the performance of its services. In order to
standardize billing, the hospital will bill, and thus recognize, a gross amount of revenue (which is
not presented on the income statement). Such gross billing and revenue recognition is based on
the list price of the services – an amount the hospitals and the companies seldom, if ever,
anticipate receiving. On the income statement, the hospital or company presents net revenue
which is composed of the gross revenue amount less a “contractual allowance reserve”.
Generally, the contractual allowance reserve represents the Company’s estimate, based on its
payors’ history, of the gross list revenue which the hospital or company does not expect to
collect. Thus, revenue is presented on the income statement at the estimated net realizable
amount from patients, third-party and government payors, and others.
In addition, accounts receivable are also presented net of the contractual allowance reserve,
indicating the net realizable value of the accumulated revenue recognized. The resulting accounts
receivable balance is also netted against a bad debt reserve (allowance for doubtful accounts)
which relates to the actual amount the Company believes it will collect in cash from the
receivable. Since the initial contractual allowance has already been taken out of the receivable
balance, the allowance for doubtful accounts primarily relates to the portion of the account that
must be paid by the individual as well as uninsured accounts.
Example of Presentation of Allowance of doubtful debts and Bad debt expense
Income Statement
Gross Revenue 200
Less: Contractual Allowance Reserve (10)
Net Revenue 190
COGS (100)

2. SG&A (20)
Taxes (20)
Net Income 50
Balance Sheet
Gross Accounts Receivable 200
Less: Contractual Allowance Reserve (10)
Less: Allowance for Doubtful Accounts ( 5)
Net Accounts Receivable 185
Prior Period Allowance for Doubtful Accounts 4
Plus: Additions to Provision for Bad Debts 6
Less: Write-offs (5)
Current Period Allowance for Doubtful Accounts 5
Solution
Provision of Doubtful debts and bad debt expense is an important estimate in every business. For
service Industry like health care or hospital Industry, this provision needs to be calculated with
special care.
Accounting Standards Update No 2011-07, Presentation and Disclosure of Patient Service
Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts of Certain Health
Care Entities were developed to clarify the presentation of the provision for bad debts and related
allowance for doubtful accounts and ultimately provide better transparency to users of the
financial statements of health care entities.
Calculation of reserve for doubtful debts and bed debt expense
Reserve/Provision of Bad debt is an estimate of non recovery of Account receivable. In
Accounting, an Provision is created on the basis of best possible estimate for the non recovery of
amount due to some Debtors.
Hospitals recognize revenue upon completion of the performance of its services. In order to
standardize billing, the hospital will bill, and thus recognize, a gross amount of revenue (which is
not presented on the income statement). Such gross billing and revenue recognition is based on
the list price of the services – an amount the hospitals and the companies seldom, if ever,
anticipate receiving. On the income statement, the hospital or company presents net revenue
which is composed of the gross revenue amount less a “contractual allowance reserve”.
Generally, the contractual allowance reserve represents the Company’s estimate, based on its
payors’ history, of the gross list revenue which the hospital or company does not expect to
collect. Thus, revenue is presented on the income statement at the estimated net realizable

3. amount from patients, third-party and government payors, and others.
In addition, accounts receivable are also presented net of the contractual allowance reserve,
indicating the net realizable value of the accumulated revenue recognized. The resulting accounts
receivable balance is also netted against a bad debt reserve (allowance for doubtful accounts)
which relates to the actual amount the Company believes it will collect in cash from the
receivable. Since the initial contractual allowance has already been taken out of the receivable
balance, the allowance for doubtful accounts primarily relates to the portion of the account that
must be paid by the individual as well as uninsured accounts.
Example of Presentation of Allowance of doubtful debts and Bad debt expense
Income Statement
Gross Revenue 200
Less: Contractual Allowance Reserve (10)
Net Revenue 190
COGS (100)
SG&A (20)
Taxes (20)
Net Income 50
Balance Sheet
Gross Accounts Receivable 200
Less: Contractual Allowance Reserve (10)
Less: Allowance for Doubtful Accounts ( 5)
Net Accounts Receivable 185
Prior Period Allowance for Doubtful Accounts 4
Plus: Additions to Provision for Bad Debts 6
Less: Write-offs (5)
Current Period Allowance for Doubtful Accounts 5