© Copyright
Doug Hillman 2000
1

Receivables on Balance Sheet
 Trade receivables
› Arise from sale of goods or services to customers
 Nontrade receivables
› Arise from other sources
© Copyright
Doug Hillman 2000
2

Bad Debts Expense
 An account receivable that proves uncollectible
 Accrual accounting requires that we recognize the bad debts expense in the same period as the sales revenue
 Since we may not know at end of period which accounts will be uncollectible, we must estimate the amount
 Use allowance method
© Copyright
Doug Hillman 2000
3

Recording Bad Debts
Adjustment
 Estimate and record amount in an endof-period adjustment
 Estimate uncollectible amount
 Record increase in expense and decrease in accounts receivable
 Since specific uncollectible account not known, use contra account Allowance for Doubtful Accounts
© Copyright
Doug Hillman 2000
4

Balance Sheet Presentation
Current assets
Cash
Accounts receivable $8,000
$1,000
Deduct: Allow for DA 500 7,500
Notes receivable 900
© Copyright
Doug Hillman 2000
5

Writing Off Uncollectible
Accounts
 After determining a specific account is uncollectible
 Decrease accounts receivable
 Decrease allowance for doubtful accounts
© Copyright
Doug Hillman 2000
6

Balance Sheet
Before Write-off After
Accts Rec $8,000 $(200) $7,800
Allowance 500 (200) 300
Net realizable value $7,500 $7,500
© Copyright
Doug Hillman 2000
7

Recovery of Bad Debts
 Reinstate the account
› Increase accounts receivable
› Increase allowance for doubtful accounts
 Collect the account
› Increase cash
› Decrease accounts receivable
© Copyright
Doug Hillman 2000
8

Estimating Bad Debts:
Based on Sales
 Use a historical average of annual uncollectibles to annual net sales
 Calculate amount of bad debts expense
› Multiply net sales by percent
 Adjust Bad Debts Expense by the amount calculated
© Copyright
Doug Hillman 2000
9

Estimating Bad Debts:
Based on Accounts Receivable
 Use a historical average of annual uncollectibles to year end accounts receivable
 Calculate balance of allowance for doubtful accounts
› Multiply year end accounts receivable by percent
 Adjust Allowance for Doubtful Accounts to the amount calculated
© Copyright
Doug Hillman 2000
10

Aging of Accounts Receivable
 Schedule that lists each invoice by days elapsed since due date
 Aging categories
› Not Yet Due
› 1-30 Days Past Due
› 21-60 Days Past Due
› etc.
© Copyright
Doug Hillman 2000
11

Estimating Bad Debts with
Aging Schedule
 Use different percentage to estimate uncollectible amount for each aging category
 Sum of amounts calculated is desired balance in Allowance for Doubtful
Accounts
© Copyright
Doug Hillman 2000
12

Direct Write-off Method
 Write off accounts receivable and record expense when account determined to be uncollectible
 Causes a mismatching of revenue and expense
 Simple to maintain
© Copyright
Doug Hillman 2000
13

Credit Card Sales
 Credit card fee reduces amount received from sales amount
 Bank credit cards
› Accepted as deposit for amount of sale less fee
 Nonbank credit card
› Receivable for amount of sale less fee
© Copyright
Doug Hillman 2000
14

Analyzing Information
 Is percent of bad debts expense to net sales increasing or decreasing?
 Is percent of allowance for doubtful accounts to gross accounts receivable increasing or decreasing?
© Copyright
Doug Hillman 2000
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