The System of Accounting

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Accounts
Receivable and
Bad Debts
Expense
© 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
Deduct: Allow for DA
500
Notes receivable
© Copyright Doug Hillman 2000
$1,000
7,500
900
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
Accts Rec $8,000
$(200)
Allowance
500
(200)
Net realizable
value
$7,500
© Copyright Doug Hillman 2000
After
$7,800
300
$7,500
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
15
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