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ClassClass BBA (A)BBA (A)
Group memberGroup member Muhammad Ishfaq 83Muhammad Ishfaq 83 Asim Javed 04Asim Javed 04Abdus Samad Hashmi 93Abdus Samad Hashmi 93 Zahid Iqbal 84Zahid Iqbal 84Arshia Abbas 89Arshia Abbas 89 Muniba Gul 94Muniba Gul 94Sana Tariq 47Sana Tariq 47
Assignment
On
AccOunting
Bad Debts Bad Debts
Definition:The amount, which cannot be
recovered from the debtors are called bad debts
Debts that come from credit customers who do not pay their bills
Affects a company’s credit policy
Bad DebtsBad 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.
Dec 1Sales of $5,000
recorded
2008 2009
Dec 31End of fiscal year
Jul 1Debt
determinedto be bad
Bad DebtsBad Debts
Bad debts expense should be recognized in the accounting period in which the sales were made.
Dec 1Sales of $5,000
recorded
2008 2009
Dec 31End of fiscal year
Jul 1Debt
determinedto be bad
Bad DebtsBad Debts
Solution: Estimate how many of the current sales will be uncollectible
Dec 1Sales of $5,000
recorded
2008 2009
Dec 31End of fiscal year
Jul 1Debt
determinedto be bad
Prepare an adjusting entry
Doubtful AccountsDoubtful AccountsIs a contra accountIs subtracted from accounts receivableAccumulates expected amount of
uncollectible as of a given date
Adjusting Entry for Bad DebtsAdjusting Entry for Bad Debts
General Journal
Date Account Titles and
DescriptionPR Dr. Cr.
Debtor’s account
Dec 31 Bad Debts Expense XXXX
Allowance for Doubtful Accounts/ XXXX
Balance Sheet PresentationBalance Sheet Presentation
Current Assets:Cash $ 10,400Accounts receivable $100,000Less: Allowance for doubtful accounts 6,000 94,000Merchandise inventory 300,000Total current assets $404,400
Corbin CompanyCorbin CompanyPartial Balance SheetPartial Balance SheetDecember 31, 2008December 31, 2008Gross
AmountEstimated to
beUncollectible
Net Realizable
Value
Total Current Assets
Net Realizable ValueNet Realizable Value• The amount of Accounts Receivable that
is expected to be collected• Calculated by subtracting Allowance for
Doubtful Accounts from Accounts Receivable
Income Statement ApproachIncome Statement Approach
Using the income statement approach and the balance sheet approach to estimate the amount of Bad Debts Expense
Estimating the AmountEstimating the Amount
General Journal
Date Account Titles and
DescriptionPR Dr. Cr.
Dec 31 Bad Debts Expense XXXX
Allowance for DoubtfulAccounts XXXX
How is this amount
determined?
Income Statement ApproachIncome Statement Approach
Bad Debts Expense = Percentage of net credit sales
Compute Net Sales: Credit Sales $110,000
Sales Returns & Allowances (500)Sales Discounts (9,500) Net credit Sales $100,000
General Journal
Date Account Titles and Description
PR Dr. Cr.
Dec 31 Bad Debts Expense 4,000
Allowance for DoubtfulAccounts 4,000
Accounts ReceivableBal. 30,000
Allowance forDoubtful Accounts
5,0004,000 Adj.
$9,000 Bal.
Any existing balance in theAny existing balance in theAllowance account is ignored.Allowance account is ignored.
Balance Sheet ApproachBalance Sheet ApproachNet 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
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