Valuing Accounts Receivable
Methods for accounting for uncollectible
accounts:
1. Direct method (does not satisfy GAAP)
2. Allowance method (satisfies GAAP)
a)
b)
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Income statement approach (percent of sales)
Balance sheet approach (calculates the required
balance in AFDA)
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LO 2
Allowance Method
•
•
The matching principle requires that bad
debts expense be matched and reported
in the same period as the sale that
generated the receivable.
The allowance method satisfies the
matching principle by matching expected
bad debts losses (expenses) with
revenues that produced the losses.
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© 2013 McGraw-Hill Ryerson Limited.
LO 2
Recording Estimated Bad Debt
Expense
Adjustments for bad debts are made at the
end of the accounting period.
Adjustments use a contra-asset account
called Allowance for Doubtful Accounts.
•
•
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© 2013 McGraw-Hill Ryerson Limited.
LO 2
Recording Estimated Bad Debt
Expense - Allowance Method
Example: The estimated bad debts for TechCom
is $1,500.
The period end entry to record bad debts is:
Bad Debts Expense
1,500
Allowance for Doubtful Accounts 1,500
An allowance account is used since we do not
know which accounts will be uncollectible.
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© 2013 McGraw-Hill Ryerson Limited.
LO 2
Writing Off a Bad Debt Allowance Method
Example: A specific customer’s account
(Jack Kent) is considered uncollectible.
The entry to record the write-off is:
Allowance for Doubtful Accounts
520
Accounts Receivable - Jack Kent
520
Note that there is no expense recorded when
the account is written off. The estimated
expense was previously recorded.
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© 2013 McGraw-Hill Ryerson Limited.
LO 2
General Ledger Balances
Bad Debts Expense
1,500
Allowance for Doubtful Accounts
1,500
To record estimated bad debts
Allowance for Doubtful Accounts
520
Accounts Receivable - Jack Kent
To write off an uncollectible account
Accounts Receivable
Allow. For Doubtful Accts.
bal. 20,000
1,500
520
520
bal. 19,480
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520
bal. 980
© 2013 McGraw-Hill Ryerson Limited.
LO 2
Realizable Value Before and After
Write-off
Accounts Receivable
Allow. For Doubtful Accts.
bal. 20,000
1,500
520
520
bal. 19,480
bal. 980
Before
Write-off
Accounts Receivable
Less: Allowance for Doubtful Accounts
Est. Realizable Accounts Receivable
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© 2013 McGraw-Hill Ryerson Limited.
After
Write-off
$20,000
$19,480
1,500
980
$18,500
$18,500
LO 2
Recovery of a Bad DebtAllowance Method
Example: Jack Kent pays his account in full after
the account had been written off. Entries are
needed to record the reinstatement of the
account and the subsequent collection.
The entries are:
Accounts Receivable-Jack Kent
520
Allowance for Doubtful Accounts
520
To reinstate customer’s account.
Cash
Accounts Receivable-Jack Kent
To record collection of account.
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© 2013 McGraw-Hill Ryerson Limited.
520
520
LO 2