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Accounts Receivable (AR)

Trade Receivable Non-Trade Receivable

Accounts Notes  Variety of transactions.

 Examples:
Receivable Receivable
 Advances to officers and
• Sale of goods • Sales, employees.
or services. financing, or  Advances to subsidiaries.
 Deposits paid to cover
• Oral other
potential damages or losses.
promises. transactions.  Dividend receivable.
• On average, • Written  Interest receivable.
 Tax refund receivable.
30 or 60 promises
 Claims.
days. • Short- or
long-term

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 Valuation of Accounts
Receivable
 What amount of the total accounts receivable can a
company reasonably expect to collect (the “net realizable
value”)?
 Risk of not collecting money from customers
 Two methods to account for this type of risk:
 Direct write-off method
 Write-off account receivable when it becomes uncollectible.
 Allowance method
 Account for the allowance of doubtful account when it is
expected to not collect a portion of accounts receivable.

Comparison of Income Statement

Approach vs. Balance Sheet Approach

Target balance is
“Allowance for
Doubtful
Account” and it
will always have a
CREDIT balance

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 Balance Sheet Approach
Accounts Receivable
 Aging-of-Receivables Method
Beg.
Under the aging method, a company Balance
+X
“ages” the ending balance in
accounts receivable by classifying the
5,000,000
individual customer balances into
categories according to how many
days the account has been Allowance for
doubtful account
outstanding.
40,000
For example, assume the ending balance of accounts
receivable is $5,000,000 and the allowance for doubtful
account (ADA) has a $40,000 credit balance (NRV =
$4,960,000) before the year-end adjustment for bad
debt expense.
?
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For example, assume the ending balance of accounts receivable is

$5,000,000 and the allowance for doubtful account (ADA) has a
$40,000 credit balance (NRV = $4,960,000) before the year-end
adjustment for bad debts. The company prepares the following aging
schedule based on the ending A/R:
Customer Current 1-30 days 31-60 days Over 60 days Total
A XXX XXX

Baker XXX

Etc… XXXX XXXXX XX XXX XXX

X

Zebra _______ XXX_ _ _XX __________ XXX

Totals $3,000,000 $1,000,000 $600,000 $400,000 $5,000,0
00

Estimated % _ 1% ___ 2% 10% 40%

Expected
Uncollectible $30,000 $20,000 $60,000 $160,000 $270,000

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 For example, assume the ending balance of accounts receivable is
$5,000,000 and the allowance for doubtful account (ADA) has a
$40,000 credit balance (NRV = $4,960,000) before the year-end
adjustment for bad debts. The company prepares the following aging
schedule based on the ending A/R:
Customer Current 1-30 days 31-60 days Over 60 days Total
Estimated % _ 1% ___ 2% 10% 40%
Est.
Uncollectible $30,000 $20,000 $60,000 $160,000 $270,000

Allowance for doubtful

account Net realizable value (before adjustment) =
5,000,000 – 40,000 = 4,960,000

40,000 Net realizable value (after adjustment) =

5,000,000 – 270,000 = 4,730,000
? Journal entry:

270,000 (Debit) Bad debt expense 230,000

(Credit) ADA 230,000

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 For example, assume the ending balance of accounts receivable is
$5,000,000 and the allowance for doubtful account (ADA) has a
$40,000 credit balance (NRV = $4,960,000) before the year-end
adjustment for bad debts. The company prepares the following aging
schedule based on the ending A/R:
Customer Current 1-30 days 31-60 days Over 60 days Total
A XXX XXX

Baker XXX

Etc… XXXX XXXXX XX XXX XXX

X

Zebra _______ XXX_ _ _XX __________ XXX

Totals $3,000,000 $1,000,000 $600,000 $400,000 $5,000,0
00

Estimated % _ 1% ___ 2% 10% 40%

Expected
Uncollectible $30,000 $20,000 $60,000 $160,000 $270,000

For example, assume the ending balance of accounts receivable is

$5,000,000 and the allowance for doubtful account (ADA) has a
$40,000 credit balance (NRV = $4,960,000) before the year-end
adjustment for bad debts. The company prepares the following aging
schedule based on the ending A/R:
Customer Current 1-30 days 31-60 days Over 60 days Total
A XXX XXX

Baker XXX

Etc… XXXX XXXXX XX XXX XXX

X

Zebra _______ XXX_ _ _XX __________ XXX

Totals $3,000,000 $1,000,000 $600,000 $400,000 $5,000,0
00

Estimated % _ 1% ___ 2% 5% 20%

Expected
Uncollectible $30,000 $20,000 $30,000 $80,000 $160,000

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5
 For example, assume the ending balance of accounts receivable is
$5,000,000 and the allowance for doubtful account (ADA) has a
$40,000 credit balance (NRV = $4,960,000) before the year-end
adjustment for bad debts. The company prepares the following aging
schedule based on the ending A/R:
Customer Current 1-30 days 31-60 days Over 60 days Total
Estimated % _ 1% ___ 2% 5% 20%
Est.
Uncollectible $30,000 $20,000 $30,000 $80,000 $160,000

Allowance for doubtful

account Net realizable value (before adjustment) =
5,000,000 – 40,000 = 4,960,000

40,000 Net realizable value (after adjustment) =

5,000,000 – 160,000 = 4,840,000
? = 120,000
Journal entry:
160,000 (debit) Bad debt expense 120,000
(credit) ADA 120,000

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For example, assume the ending balance of accounts receivable is

$5,000,000 and the allowance for doubtful account (ADA) has a
$540,000 credit balance (NRV = $4,460,000) before the year-end
adjustment for bad debts. The company prepares the following aging
schedule based on the ending A/R:
Customer Current 1-30 days 31-60 days Over 60 days Total
Estimated % _ 1% ___ 2% 5% 20%
Est.
Uncollectible $30,000 $20,000 $30,000 $80,000 $160,000

Allowance for doubtful

account Net realizable value (before adjustment) =
5,000,000 – 540,000 = 4,460,000
540,000
Net realizable value (after adjustment) =
5,000,000 – 160,000 = 4,840,000
? = 380,000
Journal entry:

160,000 (debit) ADA 380,000

(credit) Bad debt expense 380,000

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Aging of Receivables Method

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 Date Accounts and Explanation Debit Credit
2024
Accounts Receivable 475,000
Sales Revenue 475,000

Cash 451,800
Accounts Receivable 451,800

Allowance for Bad Debts 3,200

Accounts Receivable—Randall Co. 1,800
Accounts Receivable—Oliver Welch 900
Accounts Receivable—Rain, Inc. 500

Dec. 31 Bad Debts Expense 11,201

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Date Accounts and Explanation Debit Credit

2024
Accounts Receivable 475,000
Sales Revenue 475,000

Cash 451,800
Accounts Receivable 451,800

Allowance for Bad Debts 3,200

Accounts Receivable—Randall Co. 1,800
Accounts Receivable—Oliver Welch 900
Accounts Receivable—Rain, Inc. 500

Dec. 31 Bad Debts Expense 11,201

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 Date Accounts and Explanation Debit Credit
2024
Accounts Receivable 475,000
Sales Revenue 475,000

Cash 451,800
Accounts Receivable 451,800

Allowance for Bad Debts 3,200

Accounts Receivable—Randall Co. 1,800
Accounts Receivable—Oliver Welch 900
Accounts Receivable—Rain, Inc. 500

Dec. 31 Bad Debts Expense 11,201

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= $3,200 (total write-off )

Date Accounts and Explanation Debit Credit

2024
Accounts Receivable 475,000
Sales Revenue 475,000

Cash 451,800
Accounts Receivable 451,800

Allowance for Bad Debts 3,200

Accounts Receivable—Randall Co. 1,800
Accounts Receivable—Oliver Welch 900
Accounts Receivable—Rain, Inc. 500

Dec. 31 Bad Debts Expense 11,201

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 = $3,200 (total write-off )

Date Accounts and Explanation Debit Credit

2024
Accounts Receivable 475,000
Sales Revenue 475,000

Cash 451,800
Accounts Receivable 451,800

Allowance for Bad Debts 3,200

Accounts Receivable—Randall Co. 1,800
Accounts Receivable—Oliver Welch 900
Accounts Receivable—Rain, Inc. 500

Dec. 31 Bad Debts Expense 11,201

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Age of Accounts Receivable

1 – 30 31 – 60 61 – 90 Over 90 Days Total Receivables
Days Days Days
Accounts Receivable $97,000 $37,000 $17,000 $14,000 $ 165,000
Percent uncollectible × 0.3% × 3.0% × 30.0% × 35.0%
Estimated total $ 291 $ 1,110 $ 5,100 $ 4,900 $ 11,401 (Target
uncollectible Balance)

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 Age of Accounts Receivable
1 – 30 31 – 60 61 – 90 Over 90 Days Total Receivables
Days Days Days
Accounts Receivable $97,000 $37,000 $17,000 $14,000 $ 165,000
Percent uncollectible × 0.3% × 3.0% × 30.0% × 35.0%
Estimated total $ 291 $ 1,110 $ 5,100 $ 4,900 $ 11,401 (Target
uncollectible Balance)

Dec. 31 Bad Debts Expense 11,201

Allowance for Bad Debts 11,201
($11,401 – ($3,400 – 3,200) = $11,201)

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Accounts Receivable
Sep. 30 Bal. 145,000 451,800 Collections
Net credit sales 475,000 3,200 Write-offs
Dec. 31 Bal. 165,000

Allowance for Bad Debts

3,400 Sep. 30 Bal.
Write-offs 3,200
200 Unadj. Bal.
11,201 Adj.
11,401 Dec. 31 Bal.

SPRING MOUNTAIN MEDICAL CENTER

Balance Sheet−Partial
December 31, 2024
Net
Assets Realizable
Current Assets: Value
Accounts Receivable $ 165,000
Less: Allowance for Bad Debts (11,401) $ 153,599

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Accounts Receivable
Sep. 30 Bal. 145,000 451,800 Collections
Net credit sales 475,000 5,000 Write-offs
Dec. 31 Bal. 165,000

Allowance for Bad Debts

3,400 Sep. 30 Bal.
Write-offs 5,000
Unadj. Bal. 1,600
13,001 Adj.
11,401 Dec. 31 Bal.

SPRING MOUNTAIN MEDICAL CENTER

Balance Sheet−Partial
December 31, 2024
Net
Assets Realizable
Current Assets: Value
Accounts Receivable $ 165,000
Less: Allowance for Bad Debts (11,401) $ 153,599

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