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Accounts Receivable and Bad Debts Expense

Copyright Doug Hillman 2000

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

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

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

Balance Sheet Presentation


Current assets Cash Accounts receivable $8,000 Deduct: Allow for DA 500 Notes receivable

$1,000
7,500 900

Copyright Doug Hillman 2000

Writing Off Uncollectible Accounts


After determining a specific account is uncollectible Decrease accounts receivable Decrease allowance for doubtful accounts

Copyright Doug Hillman 2000

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

Copyright Doug Hillman 2000

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

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

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

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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

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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

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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

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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

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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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