ACCT 1005 _ Accounting For Receivables
Monies owed to business by other businesses or
individuals
These claims arise from:
Selling goods or services on account/credit
Lending money
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1. Amount due from customers for goods/services on account
2. Classified as a current asset on the Bs
3. Shown at Net Realizable Value
Types
of Receivables
1. Written Promise to receive cash
2. Current Asset or L-T Asset on the Bs (Maturity)
Trade Receivables – Notes & AR that result from sales
OTHER RECEIVABLES - loans to employees & interest receivable
May be Current or L-T
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University of the West Indies, Mona 37
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ACCT 1005 _ Accounting For Receivables
Uncollectible Accounts
Selling goods & services on account/credit create
a benefit (more sales)
a cost (some customers will not pay)
Uncollectible accounts give rise to an expense
referred to as
– Uncollectible-Account Expense
– Also referred to as Doubtful-Account Expense or
Bad-Debt Expense
Considered a normal business expense
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University of the West Indies, Mona 38
1. Estimate BD Expense
2. Make Adjusting JE
Accounting Dr BD Expense; Cr Allowance For BDs
3. Write-Off Bad Debt (BD) when it is identified
For
Bad Debts Dr Allowance For BDs; Cr A/Cs Receivable
4. Consistent with the matching principle (GAAP)
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University of the West Indies, Mona 39
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ACCT 1005 _ Accounting For Receivables
Percentage of Sales Method
Also called the Income Statement Approach.
It is based on prior experience of the business.
It is computed as a percentage of sales on account
(credit sales).
Disregards existing balance in the Allowance
For Bad-Debts A/C.
The percentage used is adjusted as needed to reflect
collection experience.
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University of the West Indies, Mona 40
Aging of Accounts Receivable
Also called the Balance Sheet Approach
Individual accounts receivable from specific customers are
analyzed according to the length of time they have been
outstanding.
i.e. Computer sorts customers accounts by age
Longer debt is O/S, the more likely it is that the customer will
not pay. (% increases with age of debt)
Estimated Uncollectible AR is determined by applying
percentages based on past experiences to each category
Balance on the Allowance For Bad Debts A/C is
taken into account
Bad-Debt Expense is the difference between the
required balance & the existing balance on
Allowance For Bad-Debts A/C
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University of the West Indies, Mona 41
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ACCT 1005 _ Accounting For Receivables
Bad-Debts Recovered
Collection of a previously written- off account
i) Reinstate Debtor
Dr Accounts Receivable
Cr Allow. for Bad-Debts – reinstate/reverse w/off
Dr Cash
Cr Accounts Receivable – record collection
The balance on Accounts Receivable does not change.
ii) Do Not Reinstate
Dr Cash
Cr Allow. For Bad Debts
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University of the West Indies, Mona 42
Direct Write-Off Method
Used by small, private companies
No allowance account is created
Matching concept is not adhered to
An account is written-off only when it becomes uncollectible
Dr Bad-Debt Expense
Cr Accounts Receivable
Accounts Receivable will be shown at gross value in the BS (BS
is said to be overstated)
Method permissible for tax purposes
May be acceptable if business does mainly cash sales
Accounts Receivable low
Impact would be immaterial
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University of the West Indies, Mona 43
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