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Accounts Receivable
A receivable is an amount due from another party.

This graph shows recent

dollar amounts of
receivables and their percent
of total assets for four well-
known companies.

A company must also maintain a separate account for each

customer that tracks how much that customer purchases, has
already paid, and still owes.
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Sales on Credit
On July 1, TechCom had a credit sale of $950 to CompStore
and a collection of $720 from RDA Electronics from a prior
credit sale.

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Valuing Accounts Receivable

Some customers may not pay their account. Uncollectible
amounts are referred to as bad debts.

There are two methods of

accounting for bad debts:
 Direct Write-Off Method
 Allowance Method

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Direct Write-Off Method

TechCom determines on January 23 that it cannot
collect $520 owed to it by its customer J. Kent.

Notice that the specific customer is noted in the

transaction so we can make the proper entry in the
customer’s Accounts Receivable subsidiary ledger.
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Direct Write-Off Method –

Recovering a Bad Debt
On March 11, J. Kent was able to make full payment to
TechCom for the amount previously written-off.

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Matching vs. Materiality

The matching Materiality states that

(expense recognition) an amount can be
principle requires ignored if its effect on
expenses to be the financial
reported in the same statements is
accounting period as unimportant to users’
the sales they helped business decisions.
produce.
The direct write-off method usually does not best
match the matching principle of sales and
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Allowance Method
At the end of each period, estimate total bad debts
expected to be realized from that period’s sales.

Two advantages to the allowance method:

1. It records estimated bad debts expense in the period
when the related sales are recorded.
2. It reports accounts receivable on the balance sheet at the
estimated amount of cash to be collected.

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Recording Bad Debts Expense

TechCom had credit sales of $300,000 during its first year of
operations. At the end of the first year, $20,000 of credit sales
remained uncollected. Based on the experience of similar
businesses, TechCom estimated that $1,500 of its accounts
receivable would be uncollectible.

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Balance Sheet Presentation

TechCom had credit sales of $300,000 during its first year of
operations. At the end of the first year, $20,000 of credit sales
remained uncollected. Based on the experience of similar
businesses, TechCom estimated that $1,500 of its accounts
receivable would be uncollectible.

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Writing Off a Bad Debt

TechCom decides that J. Kent’s $520 account is uncollectible.

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Writing Off a Bad Debt

The write-off does not affect the realizable value of

accounts receivable.

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Recovering a Bad Debt

To help restore credit standing, a customer sometimes volunteers
to pay all or part of the amount owed on an account even after it
has been written off.

On March 11, Kent pays in full his $520 account previously

written off.

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Estimating Bad Debts Expense

Accounts Receivable Methods

 Percent of Accounts Receivable
 Aging of Accounts Receivable

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Percent of Receivables Method

1. Compute the estimate of the Allowance for
Doubtful Accounts.
Year-end Accounts Receivable × Bad Debt %

2. Bad Debts Expense is computed as:

Total Estimated Bad Debts Expense
– Previous Balance in Allowance Account
= Current Bad Debts Expense

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Percent of Receivables Method

Musicland has $50,000 in accounts receivable and a $200 credit balance in
Allowance for Doubtful Accounts on December 31, 2011. Past experience
suggests that 5% of receivables are uncollectible.

Desired balance in Allowance for

Doubtful Accounts.
$ 50,000
× 5.00%
= $ 2,500

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Aging of Receivables Method

Classify each receivable by how
long it is past due.

Each age group is multiplied by its

estimated bad debts percentage.

Estimated bad debts for each group

are totaled.

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Aging of Accounts Receivable

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Aging of Accounts Receivable

Musicland has an unadjusted Allowance for Doubtful
credit balance in the allowance Accounts
200
account is $200. 2,070
2,270
We estimated the proper
balance to be $2,270.

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Aging of Accounts Receivable
• Musicland has an unadjusted Debit Balance in the allowance account $500.
• We estimate the proper balance $2270.
Allowance for Doubtful Accounts
Unadjusted 500
Required 2770
Bal. 2270

Unadjusted Balance 500

Estimated Balance 2270
-------
Required Adj. 2770

31 Dec. Bad Debt Expense 2770

Allowance for Doubtful Accounts 2770

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Summary of Methods

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LAYLI CASHIRKII (24AAD )

MUS
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XAR FEA
E ED
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QUESTIONS AND ANSWERS

1. The two methods of accounting for uncollectible accounts are

the direct write-off method and the
A. Accrual Method
B. Net Realizable Method
C. Bad Debt Method
D. Allowance Method

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QUESTIONS AND ANSWERS

2. A 90-day note dated April 20 would mature on

A. July 19 MONTHS NUMBER OF DAYS

B. July 21 APRIL
MAY
10
31
C. July 20 JUN 30

D. July 18 JULY
TOTAL DAYS
19
90

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QUESTIONS AND ANSWERS
3. Under the direct write-off method of accounting for
uncollectible accounts, Bad Debt Expense is debited
A. When a credit sale is past due.
B. At the end of each accounting period.
C. Whenever a pre-determined amount of credit sales have
been made.
D. When an account is determined to be uncollectible
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QUESTIONS AND ANSWERS
4. To record estimated uncollectible accounts using the allowance method, the
adjusting entry would be a
A. debit to Accounts Receivable and a credit to Allowance for Doubtful
Accounts.
B. debit to Bad Debt Expense and a credit to Allowance for Doubtful
Accounts.
C. debit to Allowance for Doubtful Accounts and a credit to Accounts
Receivable.
D. debit to Loss on Credit Sales and a credit to Accounts Receivable .
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QUESTIONS AND ANSWERS
5.Using the percentage-of-receivables method for recording bad debt
expense, estimated uncollectible accounts are $45,000. If the balance of the
Allowance for Doubtful Accounts is $6,000 credit before adjustment, what
is the amount of bad debt expense for that period?
a. $45,000 ALLOWANCE FOR DOUBTFUL ACC
b. $39,000 BEGINING BALANCE 6,000
WRITE OFF 0
c. $51,000 BAD DEBIT 39,000

d. $6,000 BALANCE AFTER ADJUSTMENT 45,000

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QUESTIONS AND ANSWERS
6.Using the percentage-of-receivables method for recording bad debt
expense, estimated uncollectible accounts are $45,000. If the balance of the
Allowance for Doubtful Accounts is $6,000 debit before adjustment, what is
the balance after adjustment?
a. $45,000 ALLOWANCE FOR DOUBTFUL ACC
BEGINING BALANCE 6,000
b. $51,000
c. $39,000 BAD DEBIT
BALANCE AFTER ADJUSTMENT 45,000
d. $6,000
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QUESTIONS AND ANSWERS
7. In 20XX Wilkinson Company had net credit sales of $2,250,000. On January 1, 20XX,
Allowance for Doubtful Accounts had a credit balance of $54,000. During 20XX, $90,000 of
uncollectible accounts receivable were written off. Past experience indicates that the
allowance should be 10% of the balance in receivables (percentage of receivables basis). If the
accounts receivable balance at December 31 was $600,000, what is the required adjustment
to the Allowance for Doubtful Accounts at December 31, 20XX?
a. $ 60,000 ALLOWANCE FOR DOUBTFUL ACC

b. $ 25,000 BEGINING BALANCE 54,000

WRITE OFF 90,000
c. $ 96,000 BAD DEBIT 96,000
d. $ 90,000 BALANCE AFTER ADJUSTMENT 60,000

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QUESTIONS AND ANSWERS
Erickson Company had a $300 credit balance in Allowance for
Doubtful Accounts at December 31, 20XX, before the current year's
provision for uncollectible accounts. An aging of the accounts
receivable revealed the following:

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QUESTIONS AND ANSWERS

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QUESTIONS AND ANSWERS

(b) Assume the same facts as above except that the Allowance for
Doubtful Accounts account had a $300 debit balance before the
current year's provision for uncollectible accounts. Prepare the
adjusting entry for the current year's provision for uncollectible
accounts.

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