11/23/2008
Methods of Adjusting for
Uncollectible Accounts
Valuing our
Accounts
Receivable
Allowance
Method
Dealing with Bad Debts Expense
(aka “Doubtful Accounts’)
Understanding the Allowance Methods
At the end of each period, we estimate the total bad debts
expected to be incurred from that period’s activities.
Date
GENERAL JOURNAL
Description
PR
Page 18
Debit
Credit
2004
Jun.
30 Bad Debts Expense
Balance
Sheet
Method
Direct WriteWrite-Off
Method
Income
Statement
Method
Percent of Sales
(Income Statement Method)
Method)
Under the percent of sales method, bad debts
expense is computed as follows:
2,000.00
Allow ance for Doubtful Accounts
2,000.00
Current Period Sales
× Estimated Bad Debt %
= Estimated Bad Debts Expense
To record estimate of b ad
This is a contraaccounts receivable
account.
debt expense
How we go about calculating Bad Debts figure is what creates the
two different approaches. If we calculate the Bad Debts figure as:
Percent of Sales Income Statement Method
Percent of Accounts Receivable Balance Sheet Method
Percent of Accounts Receivable
(Balance Sheet Method)
Percent of Sales Example
Microcosm Inc. has sales of $200,000 and estimates
1.0% of those sales will not be collectible. Estimated Bad
Debts Expense is calculated as $2,000.
Using the percent of accounts receivable
approach, we focus on estimating the
Allowance for Doubtful Accounts as:
$200,000.00
X 1.0%
= $2,000.00
Date
Calculate
this
figure…
GENERAL JOURNAL
Description
PR
and this
figure
follows.
Page 18
Debit
Credit
2004
Jun.
30 Bad Debts Expense
Allow ance for Doubtful Accounts
To record estimate of b ad
2,000.00
2,000.00
Month-end Accounts Receivable
× Bad Debt %
Bad Debts Expense is computed as:
Estimated adjusted balance in Allowance for
Doubtful Accounts
Unadjusted period-end balance in Allowance
for Doubtful Accounts
= Estimated Bad Debts Expense
-
debt expense
1
11/23/2008
Percent of Accounts Receivable Example
Our aim is to create a desired
balance in Allowance for
Doubtful Accounts.
$
×
= $
Date
50,000
5.00%
2,500
Jun.
Allowance for
Doubtful Accounts
500
What do we need
in order to get
this balance?
30 Bad Debts Expense
2,000
2,500
GENERAL JOURNAL
Description
2004
Reviewing Methods to
Estimate Bad Debts
We already
had a balance
forward!
PR
and this
figure
follows.
% of Receivables
Emphasis on
Matching
Emphasis on
Realizable Value
Sales
Page 18
Debit
Credit
Bad
Debts
Exp.
Accts.
Rec.
(total)
Allowance
for
Doubtful
Accts.
2,000.00
Allow ance for Doubtful Accounts
Income
Statement
Focus
2,000.00
Calculate
this
figure…
To record estimate of b ad
debt expense
Writing Off a Bad Debt
account is determined to be uncollectible,
Allowance for Doubtful Accounts will be
debited…
♦ and the customer’s account receivable will be
credited.
GENERAL JOURNAL
Description
♦ Subsequent collections require that the
original writewrite-off entry be reversed
before the cash collection is recorded.
GENERAL JOURNAL
Page 18
Date
PR Debit Credit
Page 18
Description
PR Debit Credit
2001
Mar. 11 Accounts Receivable - Kent
Allowance for doubtful accounts
2001
Jan. 23 Allowance for Doubtful Accounts
Accounts Receivable - Kent
Balance Sheet
Focus
Recovery of a Bad Debt
♦ Within either allowance method, when an
Date
% of Sales
520
520
520
To re-instate a ccount previ ousl y written off
520
To record write-off of Jack
Kent's uncollectible account
11 Cash
Accounts Receivable - Kent
520
520
To record payment of account i n full
Direct WriteWrite-Off Method
Example
Direct WriteWrite-Off Method
♦ On January 23, TechCom determines it
♦ If Jack Kent later pays the $520, the
cannot collect $520 from Jack Kent, a
credit customer.
♦ The account is expensed at time of
write--off.
write
previous entry is simply reversed and
the cash collection is recorded.
GENERAL JOURNAL
Date
Description
PR
Page 18
Debit
Credit
2001
GENERAL JOURNAL
Date
Description
Page 18
PR
Debit
Credit
2001
Jan. 23 Bad Debts Expense
Accounts Receivable - Kent
To wri te off uncoll ecti lbe account
520
520
Mar. 11 Accounts receivable
Bad Debt Expense
520
520
to reverse previous write-off
11 Cash
Account receivable
520
520
to record receipt of payment
2
11/23/2008
Aging of Accounts Receivable Method
Aging of Accounts Receivable
Example
At December 31, 2001, the receivables for
DeCor were categorized as follows:
Year-end Accounts Receivable is
broken down into age
classifications.
DeCor
Schedule of Accounts Receivable by Age
31-Dec-01
Each age grouping has a different
likelihood of being uncollectible.
Days Past Due
Current
1 - 30
31 - 60
61 - 90
Over 90
Compute a separate allowance
for each age grouping.
DeCor
Schedule of Accounts Receivable by Age
31-Dec-01
Accounts
Estimated
Estimated
Receivable
Bad Debts Uncollectible
Days Past Due
Balance
Percent
Amount
$
37,000
6,500
3,500
1,900
1,000
49,900
2% $
5%
10%
25%
40%
$
x
=
37,000
6,500
3,500
1,900
1,000
49,900
Aging of Accounts Receivable
Example
Using estimated bad debt percentages, DeCor would calculate
the estimated uncollectible amount as follows:
$
$
$
Aging of Accounts Receivable
Example
Current
1 - 30
31 - 60
61 - 90
Over 90
Accounts
Receivable
Balance
740
325
350
475
400
2,290
DeCor’s unadjusted balance in the
allowance account is a debit of $200.
The previous computation shows the
desired balance is $2,290. Therefore,
the adjusting entry is for $2,290 + 200 =
$2,490.
Date
GENERAL JOURNAL
Description
Allowance for
Doubtful Accounts
200
2,490
2,290
PR
Page 18
Debit
Credit
2004
Jun.
30 Bad Debts Expense
Allow ance for Doubtful Accounts
2,490.00
2,490.00
To record estimate of b ad
debt expense
3