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Accounts Receivable
An
An accounts
accounts receivable
receivable is is created
created by by
aa credit
credit sale
sale on
on an
an open
open account.
account.
AA company
company sells sells on
on account
account because
because itit
believes
believes moremore sales
sales will
will result.
result.
Selling
Selling on on account
account involves
involves costs:
costs:
Credit-granting
Credit-granting and and collection
collection systems
systems
must
must be be put
put into
into place
place andand maintained.
maintained.
Not
Not all
all customers
customers will will pay
pay their
their debts
debts
(that
(that is,
is, amounts
amounts owedowed to to the
the company).
company).
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Accounting for Bad Debts
Bad
Bad debt
debt expense
expense (which
(which must
must be
be estimated)
estimated)
is
is the
the cost
cost that
that is
is incurred
incurred because
because not not all
all
customers
customers pay pay what
what theythey owe
owe to
to the
the company
company
(known
(known as as uncollectible
uncollectible accounts
accounts receivable).
receivable).
The
The matching
matching principle
principle requires
requires
the
the recording
recording of of bad
bad debt
debt expense
expense
in
in the
the same
same accounting
accounting period
period in
in
which
which thethe sale
sale is
is made.
made.
The
The allowance
allowance method
method satisfies
satisfies
the
the matching
matching principle.
principle.
PAST DUE
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Allowance Method –
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Two Types of Entries
1.
1. An
An adjusting
adjusting entry
entry is
is prepared
prepared
at
at the
the end
end of
of each
each period
period toto record
record
estimated
estimated badbad debt
debt expense.
expense.
2.
2. During
During the
the period,
period, entries
entries to
to
write-off
write-off specific
specific customer
customer accounts
accounts are
are
prepared
prepared when
when the
the customer
customer account
account
balances
balances areare determined
determined to to be
be
uncollectible.
uncollectible.
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Allowance Method –
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Record Bad Debt Expense
At
At the
the end
end ofof each
each period,
period,
the
the company
company estimates
estimates the
the
total
total bad
bad debts
debts expected
expected toto be
be
realized
realized fromfrom that
that period’s
period’s sales
sales (that
(that
is,
is, the
the accounts
accounts receivable
receivable that
that will
will
not
not be
be collected).
collected).
This
Thisis
isaacontra-asset
contra-assetaccount.
account.
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Presentation on Balance Sheet
On the balance sheet,
the Allowance for Doubtful Accounts is
subtracted from Accounts Receivable.
Current assets:
Cash $ ####
Accounts receivable $ 70,000
Less: Allowance for doubtful accounts 1,500 $ 68,500
Inventory ####
Etc….
Represents an estimate The amount
of the portion of expected to be
accounts receivable that collected
will not be collected. (realizable value)
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Write-Off Entry
An
An account
account that
that is
is determined
determined to to be
be
uncollectible
uncollectible is
is written
written off.
off.
The
The debit
debit isis to
to the
the
Allowance
Allowance for
for Doubtful
Doubtful Accounts.
Accounts.
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Estimating Click
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Bad Debts Expense
Companies
Companies maymay choose
choose from
from
the
the following
following methods
methods to
to estimate
estimate the
the
amount
amount of
of bad
bad debt
debt expense:
expense:
Percentage
Percentage ofof
Credit
Credit Sales
Sales Method
Method
Aging
Aging of
of Accounts
Accounts
Receivable
Receivable Method
Method
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Methods to
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Estimate Bad Debts
Percentage
Percentageofof Aging
Agingof
of
Credit
CreditSales
Sales Receivables
Receivables
Income
Income Balance
Balance
Statement
Statement Sheet
Sheet
Focus
Focus Focus
Focus
Emphasis
Emphasisis
ison
on Emphasis
Emphasisis ison
on
matching.
matching. realizable
realizablevalue.
value.
Credit Accts.
Sales Rec.
Bad Allow. for
Debts Doubtful
Expense Accts.
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Percentage of
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Credit Sales Method
The percentage of credit sales
estimated to be uncollectible
is based on past experience.
Bad debt expense is then
determined as follows:
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Percentage of
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Credit Sales Method
During the year, MusicLand had
credit sales of $400,000.
At December 31, the company
estimates that .6% (.006) of credit
sales are uncollectible.
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Aging of
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Accounts Receivable Method
Each
Eachcustomer
customeraccount
accountisisclassified
classifiedby
by
how
how long
longititis
ispast
pastits
itsdue
duedate.
date.
Each
Eachageagegrouping
groupinghashasaa
different
differentlikelihood
likelihoodof ofbeing
beinguncollectible
uncollectible
(the
(thelonger
longeran anamount
amountis ispast
pastdue,
due, the
the
more
morelikely
likelyititis
isto
tobe
beuncollectible).
uncollectible).
Past
Pastexperience
experienceisisused
used
to
toestimate
estimatethe
thepercent
percent
of
ofeach
eachclass
classthat
thatis
isuncollectible.
uncollectible.
The
Theestimates
estimatesare
arethen
thenadded
addedtogether.
together.
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Aging of
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Accounts Receivable Method
Summary of EastCo’s accounts receivable
at December 31 (by aging classification):
Estimate of amount that will not be collected
(the desired balance in the Allowance account).
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Aging of
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Accounts Receivable Method
The
TheAllowance
Allowancefor
forDoubtful
Doubtful
Accounts
Accountshas
hasaacredit
creditbalance
balance
of
of$250
$250atatDecember
December31.
31.
Per
Perthe
theprevious
previousschedule,
schedule,
the
thedesired
desiredbalance
balanceis
is$1,350.
$1,350.
