Copyright © 1999 by M. Ray Gregg. All rights reserved. 1 Receivables Uncollectible Accounts

Copyright © 1999 by M. Ray Gregg. All rights reserved.1

ReceivablesReceivables

Uncollectible Accounts



Premise:



Premise:

When you extend credit to customers…



Premise:


you know some customers won’t pay.



Premise:



Solutions:



Premise:



Solutions:

I. Notes Receivable and Interest


Premise:



Solutions:


II. Uncollectible Accounts




Premise:



Solutions:


II. Uncollectible Accounts Today



Premise:



Solutions:


II. Uncollectible Accounts

Later



Doubtful Accounts

Bad Debts


Allowance

Direct Write-Off


Allowance

Method

Direct

Write-Off

Method

Compare

Compare


Allowance MethodAdvance provision for estimate of accounts thought to be uncollectible


1/1 12/31

Total Sales


1/1 12/25

Total Sales


1/1 12/31

R


1/1 12/31

R

3/31

Our CompanyOur AddressOur City, State Zip

Our CustomerCustomer’s AddressCity, State Zip


1/1

R

4/30



12/31


1/1

R

5/31



12/31


1/1

R

5/31



E

Is that matching?

12/31


1/1

R

5/31



E

12/31



A. Advantages

1. Provides better matching of expenses with time period

I.S.

Benefit


Good CompanyBalance Sheet

December 31, xxxx

ASSETS

Current AssetsCash $10,000Accounts Receivable 30,000Merchandise Inventory 40,000Supplies 3,000Prepaid Insurance 7,000Total Current Assets $90,000



December 31, xxxx

ASSETS

Current AssetsCash $10,000Accounts Receivable 30,000Merchandise Inventory 40,000Supplies 3,000Prepaid Insurance 7,000Total Current Assets $90,000



Premise:





December 31, xxxx

ASSETS

Current AssetsCash $10,000Accounts Receivable $30,000Less: ??? ??? ? ? ?Merchandise Inventory 40,000Supplies 3,000Prepaid Insurance 7,000Total Current Assets $90,000



A. Advantages


2. Reduces value of receivables to the amount of cash ex-pected to be collected



A. Advantages


2. Reduces value of receivables to the amount of cash ex-pected to be collected

I.S.

Benefit

B.S.Benefit

How?


Allowance Method

B. Provision for estimate at year end:


Allowance Method


What kind of an account is

Allowance for Doubtful Accounts?

Bad Debts Expense est Allow for Doubtful Accts estB.S. Benefit

I.S. Benefit



December 31, xxxx

ASSETS

Current AssetsCash $10,000Accounts Receivable $30,000Less: Allow for D. A. 3,000 27,000Merchandise Inventory 40,000Supplies 3,000Prepaid Insurance 7,000Total Current Assets $87,000What kind of an account isAllowance for Doubtful Accounts?


Allowance Method


What kind of an account isAllowance for Doubtful Accounts?

Bad Debts Expense est Allow for Doubtful Accts est

Contra Asset or Contra Receivables


Allowance Method


Why use a contra account?

Bad Debts Expense est Allow for Doubtful Accts estAccounts

Receivable


Allowance Method


Why use a contra account?


Do not know which customers will not pay -- using subsidiary ledger.



December 31, xxxx

ASSETS

Current AssetsCash $10,000Accounts Receivable $30,000Less: Allow for D. A. 3,000 27,000Merchandise Inventory 40,000Supplies 3,000Prepaid Insurance 7,000Total Current Assets $87,000

“CashRealizable

Value”


Allowance Method




Allowance MethodC. Estimate may be based on:

1. Revenue

2. ReceivablesI.S. ViewB.S. View


debit Bad Debts Expenseto write off an account

direct

write

off

Method

allowance

year-endAJE

reve

nue

receivables

% x total sales

% x saleson account

% x bal.of A/Rec.

aging results

consider bal. of allowance acct




direct

write

off

Method

allowance

year-endAJE

reve

nue

receivables

% x total sales

% x saleson account

% x bal.of A/Rec.

aging results





direct

write

off

Method

allowance

year-endAJE

reve

nue

receivables

% x total sales

% x saleson account

% x bal.of A/Rec.

aging results





direct

write

off

Method

allowance

year-endAJE

reve

nue

receivables

% x total sales

% x saleson account

% x bal.of A/Rec.

aging results





direct

write

off

Method

allowance

year-endAJE

reve

nue

receivables

% x total sales

% x saleson account

% x bal.of A/Rec.

aging results





direct

write

off

Method

allowance

year-endAJE

reve

nue

receivables

% x total sales

% x saleson account

% x bal.of A/Rec.

aging results





direct

write

off

Method

allowance

year-endAJE

reve

nue

receivables

% x total sales

% x saleson account

% x bal.of A/Rec.

aging results





direct

write

off

Method

allowance

year-endAJE

reve

nue

receivables

% x total sales

% x saleson account

% x bal.of A/Rec.

aging results





direct

write

off

Method

allowance

year-endAJE

reve

nue

receivables

% x total sales

% x saleson account

% x bal.of A/Rec.

aging results




Example of Aging

Age Estimate

Less than 30 days 98%

30 – 60 days 85%

60 – 90 days 70%

90 – 120 days 50%

Over 120 days 25%



direct

write

off

Method

allowance

year-endAJE

reve

nue

receivables

% x total sales

% x saleson account

% x bal.of A/Rec.

aging results



consider bal. ofallowance account



direct

write

off

Method

allowance

year-endAJE

reve

nue

receivables

% x total sales

% x saleson account

% x bal.of A/Rec.

aging results



Income StatementView



direct

write

off

Method

allowance

year-endAJE

reve

nue

receivables

% x total sales

% x saleson account

% x bal.of A/Rec.

aging results



Balance SheetView



direct

write

off

Method

allowance

year-endAJE

reve

nue

receivables

% x total sales

% x saleson account

% x bal.of A/Rec.

aging results





1. Revenue (I.S. view)

2. Receivables (B.S. view)D. Write off an account:

Allow for Doubtful Accts bal

Accts Rec - Customer bal



1. Revenue (I.S. view)

2. Receivables (B.S. view)D. Write off an account:

Allow for Doubtful Accts bal


E. Reinstate if collected:

Accts Rec - Customer col

Allow for Doubtful Accts col

record cash collection as usual


Direct Write-Off MethodExpense recognized when account determined to be worthless


1/1

R

5/31



E

12/31


Direct Write-Off MethodExpense recognized when account determined to be worthless

A. Advantage: simplicity

B. No AJE at year end

C. No estimate


Direct Write-Off MethodD. Write off an account:

Bad Debts Expense bal




direct

write

off

Method

allowance

year-endAJE

reve

nue

receivables

% x total sales

% x saleson account

% x bal.of A/Rec.

aging results




Direct Write-Off MethodD. Write off an account:

Bad Debts Expense bal


E. Reinstate if collected:

Accts Rec - Customer col

Bad Debts Expense col

record cash collection as usual


Practice Exercise

The ledger of Kadler Company at the end of the current year shows Accounts Receivable $90,000, Sales $840,000, and Sales Returns and Allowances $40,000.

a. If Allowance for Doubtful Accounts has a credit balanceof $800 in the trial balance, journalize the adjusting entry at December 31, assuming bad debts are expected to be (1) 1% of net sales.


Practice Exercise


a. If Allowance for Doubtful Accounts has a credit balance of $800 in the trial balance, journalize the adjusting entry at December 31, assuming bad debts are expected to be (1) 1% of net sales.


How much?


Practice Exercise





Practice Exercise





Practice Exercise


Good Choices:

$8,800 ($8,000 + $800)

$8,000 (1% x $800,000)

$7,200 ($8,000 - $800)


Practice Exercise



Bad Debts Expense 8,000 Allow for Doubtful Accts 8,000

Why?



direct

write

off

Method

allowance

year-endAJE

reve

nue

receivables

% x total sales

% x saleson account

% x bal.of A/Rec.

aging results



consider bal. ofAllowance account



direct

write

off

Method

allowance

year-endAJE

reve

nue

receivables

% x total sales

% x saleson account

% x bal.of A/Rec.

aging results



Income StatementView


Practice Exercise


a. If Allowance for Doubtful Accounts has a credit balance of $800 in the trial balance, journalize the adjusting entry at December 31, assuming bad debts are expected to be (2) 10% of accounts receivable.



Practice Exercise





Practice Exercise


Good Choices:

$9,800 ($9,000 + $800)

$9,000 ($90,000 x 10%)

$8,200 ($9,000 - $800)

… and thewinner is???


Practice Exercise






direct

write

off

Method

allowance

year-endAJE

reve

nue

receivables

% x total sales

% x saleson account

% x bal.of A/Rec.

aging results



consider bal. ofAllowance account



direct

write

off

Method

allowance

year-endAJE

reve

nue

receivables

% x total sales

% x saleson account

% x bal.of A/Rec.

aging results



Balance SheetView


Practice Exercise


b. If Allowance for Doubtful Accounts has a debit balance of $500 in the trial balance, journalize the adjusting entry at December 31, assuming bad debts are expected to be (1) .75% of net sales.


Practice Exercise




Practice Exercise




Practice Exercise




Practice Exercise


Good Choices:

$5,500 ($6,000 - $500)

$6,000 (.75% x $800,000)

$6,500 ($6,000 + $500)

What doYOU think?


Practice Exercise





Practice Exercise


b. If Allowance for Doubtful Accounts has a debit balance of $500 in the trial balance, journalize the adjusting entry at December 31, assuming bad debts are expected to be (2) 8% of accounts receivable.


Practice Exercise




Practice Exercise


Good Choices:

$6,700 ($7,200 - $500)

$7,200 (8% x $90,000)

$7,700 ($7,200 + $500)

Are youready?


Practice Exercise




Yeah!!!



Documents

Copyright © 1999 by M. Ray Gregg. All rights reserved. 1 Receivables Uncollectible Accounts