Learning Objective 1
• Describe the common classes of
Classification of Receivables
• Accounts Receivable
• Credit granted to customers
• Notes Receivable
• Credit granted through a promissory note
• Other Receivables
• Resulting from loans to officers or employees
Turn to page D-5 of the NIKE, INC. Annual Report
A/R vs N/R
• 3 things distinguish a Note Receivable from an
Account Receivable:
• 1. Notes are typically for a longer period of time
• 2. Notes typically require a formal written agreement
stating due date and interest rate
• 3. Notes typically involve interest paid
Learning Objective 2
• Describe the accounting for
uncollectible receivables.
Uncollectible Receivables
• No matter what, some customers will not
pay what they owe you.
• When this happens, your business will
incur an expense.
• Uncollectible accounts expense
• Bad debts expense
• Doubtful accounts expense
Indications of None Payment
When does an account become
Past due
No response from customer
Customer files bankruptcy
Customer closes business
Company cannot locate customer
One option is to turn the account over to a collection agency.
This can be very costly.
Learning Objective 3
• Describe the allowance
method of accounting for
uncollectible receivables.
Allowance Method
• This is the preferred method of write-off of bad
• Record bad debt expense by estimating
uncollectible accounts.
1. Estimate the accounts that will not be collected and to
record expense before customers actually fail to pay.
2. Recognize expense in the same period that revenue was
ecember 31estimates that a total of $30,000 of the
$200,000 balance of their accounts receivable will
eventually be uncollectible.
The specific customer accounts cannot be
decreased, so a contra account, Allowance
for Doubtful Accounts, is credited.
The Allowance Method
The net amount that is expected to be
collected, $170,000 ($200,000 $30,000) is called the net realizable
value of the receivables. The adjusting
entry reduces receivables to the NRV
and matches uncollectible expenses
with revenues.
Suppose you identify a customer?
• On January 21, John Parker’s account of
$6,000 is written off because it is
Note that the allowance
account credited earlier is
debited at the write-off,
not Bad Debt Expense.
What happens if a customer
pays his debt?
Receipt of
cash entry
Let’s Practice!
Demonstration Problem: Kids-At-Play toy store.
Estimating Uncollectibles
• Using the allowance method requires an estimate of
uncollectible accounts at the end of the period.
• Estimate is based:
• Past experience
• Industry averages
• Forecasts of the future
• Two Methods used:
• Percentage of sales method
• Analysis of receivables method
Percentage of Sales Method
• Read “Business Connection” on page 365.
Basis for the method is the amount of this year’s net sales that
will not be collected.
If ExTone Company’s credit sales for the period are
$3,000,000 and it is estimated that 3/4% will be
uncollectible, Bad Debt Expense is debited for
$22,500 ($3,000,000 x .0075).
Now look at the T Accounts
Allowance for DA
Bad Debt Exp
Analysis of Receivables Method or
• Assumption:
• The longer an A/R is outstanding, the less likely that it will be
• Basing the estimate of uncollectible accounts on how
long specific amounts have been outstanding is called
AGING the receivables.
Aging is applied as follows:
1. the due date of each A/R is determined
2. the number of days each account is past due is
determined. (# of days between due date of account &
date of analysis.)
3. each account is placed in an aged class according to its
days past due. (see next slide for classes.)
4. the totals for each aged class are determined.
5. the total of each aged class is multiplied by an estimated
percentage of uncollectible accounts for that class.
6. the estimated total of uncollectible accounts is determined
as the sum of the uncollectible accounts for each aged
Aging Classes
Not Past Due
1-30 days late
31-60 days late
61-90 days late
91-180 days late
181-365 days late
Over 365 days late
Summary of the AGING Method
Refer to exhibit 1 on page 367 of text book
Example of days past due
Dated August 29, due in 30 days
Due date = September 28
Aug 29-31 = 2 days
days in Sept 30 – 2 = 28
due date September 28
Calculate # of days late as of December 31
2 days past due in Sept
31 days past due in Oct
30 days past due in Nov
31 days past due in Dec
The account is 94 days past due
Allowance for DA
Ex 8-7, 8-8 page 286 & problem 8-2A page 393
Bad Debt Exp