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Accounts
Receivables
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Classification of Receivables
Accounts receivable are normally expected
to be collected within a relatively short
period, such as 30 or 60 days.
LO 1
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LO 2
Uncollectible Receivables
Regardless of how careful a company is in granting credit, some
credit sales will be
uncollectible.
The operating expense recorded from uncollectible receivables is
called bad debt
expense, uncollectible accounts expense,
or doubtful accounts expense.
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Uncollectible Receivables
Some indications that an account may be uncollectible include
the following:
The receivable is past due.
The customer does not respond to the companys attempts to
collect.
The customer files for bankruptcy.
The customer closes its business.
The company cannot locate the customer.
LO 2
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Uncollectible Receivables
The direct write-off method of accounting for uncollectible
receivables records bad
debt expense only when an account is
determined to be worthless.
The allowance method records bad debt expense by estimating
uncollectible
accounts at the end of the accounting
period.
LO 2
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Direct Write-Off Method
LO 3
On May 10, a $4,200 account receivable from
Ross has been determined to be uncollectible.
Dr Bad debt expense (IS) 4,200
Cr Accounts receivable-Ross (BS) 4,200
The account written off on May 10 is later
collected on November 21.
Dr Accounts receivable-Ross (BS) 4,200
Cr Bad debt expense (IS) 4,200
Reinstatement entry.
Dr Cash 4,200
Cr Accounts receivable-Ross 4,200
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Direct Write-off Method
LO 3
Accounts receivable - Ross
Bal b/f 4,200 Write-off 4,200
Reins. 4,200 Cash 4,200
8,400 8,400
Bal b/f 0
Cash
Received 4,200
Bad debts Expense
Write-off 4,200 Reins. 4,200
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LO 4
The Allowance Method
The specific customer accounts
cannot be decreased, so a contra
account, Provision/Allowance for
Doubtful Accounts, is credited.
On December 31, ExTone Company estimates that a
total of $30,000 of the $200,000 balance of their
accounts receivable will eventually be uncollectible.
Dr Bad debt expense (IS) 30,000
Cr Provision for doubtful debts (BS) 30,000
Estimated provision for doubtful debts.
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The Allowance Method
The net amount that is expected to be collected, $170,000
($200,000 $30,000), is called the net realizable value (NRV) of
the
receivables.
The adjusting entry reduces receivables to the NRV and matches
uncollectible
expenses with revenues.
LO 4
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Allowance Method
LO 3
Accounts receivable
Bal b/f 200,000
Provision for doubtful debts
30,000
Bad debts Expense
30,000
Net realisable value
of receivables
= 200,000 30,000 = 170,000
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The Allowance Method
LO 4
Note that the Provision
account credited earlier is
debited at the write-off, not
Bad Debt Expense.
On January 21, Parkers account of $6,000 is written off because
it is uncollectible.
Dr Provision for doubtful debts (BS) 6,000
Cr Accounts receivable-Parker (BS) 6,000
Provision for doubtful debts
A/cs Rec. Parker 6,000
Bad debts
expense 30,000
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The Allowance Method LO 4
During 2012, ExTone Company writes off $26,750 of uncollectible
accounts, including the $6,000
account of John Parker.
After posting all entries to write off uncollectible amounts,
Allowance for Doubtful Accounts will
have a credit balance of $3,250 ($30,000 $26,750).
Provision for doubtful debts
A/cs Rec. - Parker
6,000
Bad debts
expense 30,000
A/cs Rec Others 20,750
Bal c/f 3,250
30,000 30,000
Bal b/f 3,250
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The Allowance Method
LO 4
Nancy Smiths account of $5,000, which was written off on April
2, is later collected on June 10.
Original entry (write-off):
Dr Provision for doubtful debts (BS) 5,000
Cr Accounts receivable-Nancy (BS) 5,000
Dr Accounts receivable-Nancy (BS) 5,000
Cr Provision for doubtful debts (BS) 5,000
Reinstatement of entry.
Dr Cash (BS) 5,000
Cr Accounts receivable-Nancy (BS) 5,000
Cash received from Nancy.
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The Allowance Method LO 4
At the start of a year, a business has RM3,000 on its
provision for doubtful debts account.
By the end of the year, doubtful debts have
decreased to RM2,500.
Dr Provision for doubtful debts 500
Cr Provision for doubtful debts written back 500
(Other revenue)
Provision for doubtful debts
Prov for DD
w/back 500
Bal b/f 3,000
Bal c/f 2,500
3,000 3,000
Bal b/f 2,500
Provision for doubtful debts
written back (Revenue)
PDD 500
