Chapter 13

Accounting for Bad Debts

© 2010 Prentice Hall Business

Publishing, College Accounting: A
Practical Approach, 11e by Slater
 Learning Objective 1
Describing how the Bad Debts Expense
account and the Allowance for Doubtful
Accounts account are used to record bad
debts

LO-1
© 2010 Prentice Hall Business
Publishing, College Accounting: A
Practical Approach, 11e by Slater
 Bad Debts
 Debts that come from credit customers
who do not pay their bills
 Affects a company’s credit policy
 Cannot grant credit to just any company

LO-1
© 2010 Prentice Hall Business
Publishing, College Accounting: A
Practical Approach, 11e by Slater
 Bad Debts

On December 1, 2008, Corey Co. sold

merchandise on account for $5,000.
On July 1, 2009, Corey Co. determines that the
$5,000 will never be collected.

2008 2009
Dec 1 Dec 31 Jul 1
Sales of End of Debt
$5,000 fiscal determined
recorded year to be bad

LO-1
© 2010 Prentice Hall Business
Publishing, College Accounting: A
Practical Approach, 11e by Slater
 Bad Debts

Bad debts expense should be recognized in

the accounting period in which the sales
were made.

2008 2009
Dec 1 Dec 31 Jul 1
Sales of End of Debt
$5,000 fiscal determined
recorded year to be bad

LO-1
© 2010 Prentice Hall Business
Publishing, College Accounting: A
Practical Approach, 11e by Slater
 Bad Debts

Solution: Estimate how many of the current

sales will be uncollectible
Prepare an
adjusting entry

2008 2009
Dec 1 Dec 31 Jul 1
Sales of End of Debt
$5,000 fiscal determined
recorded year to be bad

LO-1
© 2010 Prentice Hall Business
Publishing, College Accounting: A
Practical Approach, 11e by Slater
 Allowance for Doubtful Accounts
 Is a contra-asset account
 Is subtracted from accounts receivable
 Accumulates expected amount of
uncollectibles as of a given date

© 2010 Prentice Hall Business LO-1

Publishing, College Accounting: A
Practical Approach, 11e by Slater
 Adjusting Entry for Bad Debts

General Journal
Page 8
Date Account Titles and PR Dr. Cr.
Description
Dec 31 Bad Debts Expense XXXX
Allowance for
Doubtful Accounts XXXX

Contra-Asset
© 2010 Prentice Hall Business
Account LO-1
Publishing, College Accounting: A
Practical Approach, 11e by Slater
 Balance Sheet Presentation
Corbin Company
Partial Balance Sheet Net
Gross Realizable
Amount
December 31, 200X Value
Estimated to
Current Assets: be
Cash Uncollectible $ 10,400
Accounts receivable $100,000
Less: Allowance for
doubtful accounts 6,000 94,000
Merchandise inventory 300,000
Total current assets $404,400
Total Current
© 2010 Prentice Hall Business Assets LO-1
Publishing, College Accounting: A
Practical Approach, 11e by Slater
 Net Realizable Value
• The amount of Accounts Receivable that
is expected to be collected
• Calculated by subtracting Allowance for
Doubtful Accounts from Accounts
Receivable

LO-1
© 2010 Prentice Hall Business
Publishing, College Accounting: A
Practical Approach, 11e by Slater
 Writing off an account
General Journal
Page 8
Date Account Titles and PR Dr. Cr.
Description

Jul 1 Allowance for Doubtful

Accounts 5,000
Accounts Receivable-Discello 5,000

© 2010 Prentice Hall Business LO-1

Publishing, College Accounting: A
Practical Approach, 11e by Slater
 Learning Objective 2
Using the income statement approach and
the balance sheet approach to estimate
the amount of Bad Debts Expense

© 2010 Prentice Hall Business LO-2

Publishing, College Accounting: A
Practical Approach, 11e by Slater
 Estimating the Amount

General Journal
Page 8
Date Account Titles and Description PR Dr. Cr.
Dec 31 Bad Debts Expense XXXX
Allowance for Doubtful
Accounts XXXX

How is this
amount
© 2010 Prentice Hall Business determined? LO-2
Publishing, College Accounting: A
Practical Approach, 11e by Slater
 Income Statement Approach
Bad Debts Expense =
Percentage of net credit sales
Focus is on measuring
the expense, which is
reported on Income
Statement.

Matching requirement-
ignores previous balance of
Allowance for Doubtful
Accounts when estimating
Bad Debts Expense for
current period.

© 2010 Prentice Hall Business LO-2

Publishing, College Accounting: A
Practical Approach, 11e by Slater
 Exercise 13-2
Compute Net Sales:
Sales
$110,000
Sales Returns & Allowances (500)
Sales Discounts (9,500)
Net Sales $100,000

© 2010 Prentice Hall Business LO-2

Publishing, College Accounting: A
Practical Approach, 11e by Slater
 Exercise 13-2

© 2010 Prentice Hall Business LO-2

Publishing, College Accounting: A
Practical Approach, 11e by Slater
 Exercise 13-2
General Journal
Page 8
Date Account Titles and PR Dr. Cr.
Description
Dec 31 Bad Debts Expense 4,000
Allowance for Doubtful
Accounts 4,000

© 2010 Prentice Hall Business LO-2

Publishing, College Accounting: A
Practical Approach, 11e by Slater
 Exercise 13-2
Any existing balance in the
Allowance account is ignored.

Accounts Receivable
Bal. 30,000

Allowance for
Doubtful Accounts
5,000
4,000 Adj.
$9,000 Bal.
© 2010 Prentice Hall Business LO-2
Publishing, College Accounting: A
Practical Approach, 11e by Slater
 Balance Sheet Approach
Adjusting entries are based on bringing the Allowance
account to a required amount.
 Method is based on the Accounts Receivable amount
and the aging process.

© 2010 Prentice Hall Business LO-2

Publishing, College Accounting: A
Practical Approach, 11e by Slater
 Balance Sheet Approach
 Net realizable value - The amount (accounts receivable
– Allowance for doubtful accounts) that is expected to
be collected.

Focus is on determining the

net realizable value of
Accounts Receivable, which
is reported on Balance Sheet

© 2010 Prentice Hall Business LO-2

Publishing, College Accounting: A
Practical Approach, 11e by Slater
 Learning Objective 3
Preparing an Aging of Accounts Receivable

© 2010 Prentice Hall Business LO-3

Publishing, College Accounting: A
Practical Approach, 11e by Slater
 Example
Mayfair Co. has the following balances in its
accounts at the end of 2008

Accounts Receivable
Bal. 30,000

Allowance for
Doubtful Accounts
500

© 2010 Prentice Hall Business LO-3

Publishing, College Accounting: A
Practical Approach, 11e by Slater
 The following aging schedule is prepared for the
end of the year. Complete the schedule.

© 2010 Prentice Hall Business LO-3

Publishing, College Accounting: A
Practical Approach, 11e by Slater
 Example
Allowance for
Accounts Receivable Doubtful Accounts
Bal. 30,000 500
2,179
Desired balance 2,679

© 2010 Prentice Hall Business LO-3

Publishing, College Accounting: A
Practical Approach, 11e by Slater
 What if the Allowance account had a debit
balance of $500 before adjustment?
Allowance for
Accounts Receivable Doubtful Accounts
Bal. 30,000 500
3,179
Desired balance 2,679

© 2010 Prentice Hall Business LO-3

Publishing, College Accounting: A
Practical Approach, 11e by Slater
 Learning Objective 4
Writing off an account using the Allowance
for Doubtful Accounts method

© 2010 Prentice Hall Business LO-4

Publishing, College Accounting: A
Practical Approach, 11e by Slater
 Allowance for Doubtful
Accounts
 When a company deems an account uncollectible, it is
written off and no longer considers it an asset.
 When the journal entry is made, allowance for doubtful
accounts and accounts receivable are reduced.
Example: J. Monaco’s account balance of $500 is deemed
uncollectible on June 1, 20X8.

General Journal
Page 8
Date Account Titles and Description PR Dr. Cr.
20X8
Jun 1 Allowance for Doubtful Accounts 500
Accounts Receivable, J. Monaco 500

© 2010 Prentice Hall Business

Publishing, College Accounting: A LO-4
Practical Approach, 11e by Slater
 Recording Recovered Debts using
Allowance for Doubtful Accounts
Example: Assume J. Monaco paid half of his
account balance of $500 on January 3, 20X9.
General Journal
Page 8
Date Account Titles and Description PR Dr. Cr.
20X9
Jan 3 Accounts Receivable, J. Monaco 250
Allowance for Doubtful Accounts 250
Restores collectible portion
3 Cash 250
Accounts Receivable, J. Monaco 250
Records payment received
© 2010 Prentice Hall Business
Publishing, College Accounting: A LO-4
Practical Approach, 11e by Slater
 Exercise 13-4 (a)
Writing off an account using the Allowance
for Doubtful Accounts account

© 2010 Prentice Hall Business LO-2, 4

Publishing, College Accounting: A
Practical Approach, 11e by Slater
 Exercise 13-4 (a)

Accts. Rec., Angie Ring

Accts. Rec., Mike Catuc

© 2010 Prentice Hall Business LO-2, 4

Publishing, College Accounting: A
Practical Approach, 11e by Slater
 Exercise 13-4 (a)

Accts. Rec., Mike Catuc

Accts. Rec., Mike Catuc

© 2010 Prentice Hall Business LO-2, 4

Publishing, College Accounting: A
Practical Approach, 11e by Slater
 Learning Objective 5
Using the direct write-off method

© 2010 Prentice Hall Business LO-5

Publishing, College Accounting: A
Practical Approach, 11e by Slater
 Direct Write-Off Method
 Used when a company cannot reasonably
estimate bad debt expense
 Uncollectible accounts are directly
written off to current year’s bad debt
expense
 The year sale was made does not matter
 Allowance for doubtful accounts is not
used

© 2010 Prentice Hall Business LO-5

Publishing, College Accounting: A
Practical Approach, 11e by Slater
 Direct Write-Off Method
Example: T. DeStadio’s account balance of $400 is
deemed to be uncollectible on May 15, 20X7.

General Journal
Page 8
Date Account Titles and Description PR Dr. Cr.
20X7
May 15 Bad Debts Expense 400
Accounts Receivable, T DeStadio 400
Wrote off account

© 2010 Prentice Hall Business LO-5

Publishing, College Accounting: A
Practical Approach, 11e by Slater
 Direct Write-Off Method
Recording Recovered Debts in same year
 Assume T. DeStadio paid $200 of his balance July 3,
20X7.
 Reverse the entry made prior by $200
General Journal
Page 8
Date Account Titles and Description PR Dr. Cr.
20X7
July 3 Accounts Receivable, T DeStadio 200
Bad Debts Expense 200

© 2010 Prentice Hall Business LO-5

Publishing, College Accounting: A
Practical Approach, 11e by Slater
 Direct Write-Off Method
Recording Recovered Debts in different year
 A new account- Bad Debts Recovered is used
 Assume T. DeStadio paid $200 of his balance on July 3, 20X8.

General Journal
Page 8
Date Account Titles and Description PR Dr. Cr.
20X8
July 3 Accounts Receivable, T DeStadio 200
Bad Debts Recovered 200
Restores collectible portion
3 Cash 200
Accounts Receivable, T DeStadio 200
Records payment received

© 2010 Prentice Hall Business

Publishing, College Accounting: A LO-5
Practical Approach, 11e by Slater
 Exercise 13-4 (b)

Accts. Rec., Angie Ring

Accts. Rec., Mike Catuc

© 2010 Prentice Hall Business LO-5

Publishing, College Accounting: A
Practical Approach, 11e by Slater
 Exercise 13-4 (b)

Accts. Rec., Mike Catuc

Accts. Rec., Mike Catuc

© 2010 Prentice Hall Business LO-5

Publishing, College Accounting: A
Practical Approach, 11e by Slater
 End of Chapter 13

© 2010 Prentice Hall Business

Publishing, College Accounting: A
Practical Approach, 11e by Slater