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6. A receivable is a company’s claims for money,
goods, or services.
An account receivable is classified as a current
asset representing money due for services
performed or merchandise sold on credit.
When an account becomes uncollectible, a bad
debt expense is incurred.
7. Example: Accounts Receivable
Assume merchandise is sold on account for $1,000.
The terms of the agreement were 2/10, n/30. The
entries are as follows:
8. Example: Accounts Receivable
Credit Sale:
Accounts Receivable 1,000
Sales Revenue 1,000
Assume merchandise is sold on account for $1,000.
The terms of the agreement were 2/10, n/30. The
entries are as follows:
9. Example: Accounts Receivable
Credit Sale:
Accounts Receivable..... 1,000
Sales Revenue......... 1,000
Collection--2/10,n/30:
Cash.............................. 980
Sales Discounts............. 20
Accounts Receivable 1,000
Assume merchandise is sold on account for $1,000.
The terms of the agreement were 2/10, n/30. The
entries are as follows:
11. Occurs when customers do not pay for items or
services purchased on credit.
Bad Debts are uncollectible accounts
receivables.
The uncollectible expense is placed on the
income statement as a selling expense.
13. EXAMPLE:
If We Have $100,000 in A/R
• All invoices are presumed to be good . . .
• (Valued at $100,000)
They would be represented by a
stack of invoices
Invoice
ABC Inc. $
Direct Method
Under the
• until we discover someone can’t pay
the amount owed.
14. Direct Method
• When an invoice is discovered to
be uncollectible — it must be
removed from A/R.
• That is it must be expensed or
written off.
Invoice
ABC Inc. $
15. Direct Method
Journal Entry to record Bad Debt:
Invoice
ABC Inc. $
Dr. Cr.
Bad Debt Expense 500
Accounts Receivable 500
16. Direct Method
Problem:
Invoice
ABC Inc. $
Accounts Receivable is reported at
the full $100,000 until bad debts are
specifically identified.
But, we know some customers in the
stack will not pay.
So, what is the real value of A/R?
17. Direct Method
Like all assets, the value of A/R is
only what you expect to collect.
Invoice
ABC Inc. $
1. Accounts Receivable is overstated.
2. Bad debt expense is understated!
It is not recorded in the same period the sale
was made.
18. • Requires expenses be recorded in the
same period the corresponding revenue
is recognized.
Direct Method is in conflict with the
Matching Principle
Not accepted under GAAP
19. Under the
Allowance Method
• We presume some invoices will not
be good . . .
• We just don’t know which ones.
Invoice
ABC Inc. $
If We Have $100,000
in A/R
21. An estimate can be
based on:
a) Size of the receivables
b) Age of the receivables
c) Past loss experience
d) All of the above
Allowance Method
22. An estimate can be
based on:
a) Size of the receivables
b) Age of the receivables
c) Past loss experience
d) All of the above
Allowance Method
23. Assume you made an estimate that
$2000 will not be collectable. What
journal entry would you make?
Dr. Cr.
Hint: Accounts Receivable is NOT reduced because
which invoices will become uncollectable is unknown!
Allowance Method
24. Dr. Cr.
Bad Debt Expense 2000
Allowance for Doubtful Accounts 2000
To record estimated bad debts
Allowance Method
25. Assets:
Cash 20,000
Accounts Receivable 100,000
Supplies 2,500
PP&E 3,000,000
Total Assets 3,120,500
The Allowance
for Doubtful
Accounts is a
contra asset
that follows A/R
26. Assets:
Cash 20,000
Accounts Receivable 100,000
Less Allowance for DA 2,000
Net Accounts Receivable 98,000
Supplies 2,500
PP&E 3,000,000
Total Assets 3,120,500
Note: Accounts Receivable is NOT reduced but the
net receivable is!
27. Journal Entry needed when an account
is identified as uncollectible:
Dr. Cr.
Allowance for Doubtful Accounts 500
Accounts Receivable 500
To write off Smith Co. (in bankruptcy)
Allowance Method
28. Dr. Cr.
Bad Debt Expense 2000
Accounts Receivable 500
Allowance Method
Allowance for DA 2000
Allowance for DA 500May 5
Dec 31
Dr. Cr.
Bad Debt Expense 500
Accounts Receivable 500
Direct Method
May 5
29. (1) The Allowance for Doubtful Accounts is a
contra-asset account which is subtracted from
accounts receivable on the balance sheet.
(2) The actual write-off entry does not reduce net
receivables, as shown below:
Acct Receivable $100,000 Acct Receivable $99,500
Less Allowance for Less Allowance for
Doubtful Accounts 2,000 Doubtful Accounts 1,500
Net Receivables $ 98,000 Net Receivables $98,000
Allowance Method
30. (1) The Allowance for Doubtful Accounts is a
contra-asset account which is subtracted from
accounts receivable on the balance sheet.
(2) The actual write-off entry does not reduce net
receivables.
(3) The estimation error inherent in this approach is
more acceptable than the violation of matching
with the direct write-off method.
Allowance Method
31. Reverse Write Off:
Accounts Receivable 500
Allowance for Doubtful Accounts 500
To reinstate a written-off receivable.
32. Reverse Write Off:
Accounts Receivable 500
Allowance for Doubtful Accounts 500
To reinstate a written-off receivable.
Eliminate Receivable:
Cash 500
Accounts Receivable 500
Payment for written-off receivable.
Reversing Written-Off Receivables
33. Percentage of Total Receivables-- Determines
the desired balance for Allowance for Doubtful
Accounts. The difference between the actual
and the desired balance is the expense entry.
Aging Method--The process of categorizing
each account receivable by the number of days
it has been outstanding.
34. Example: Bad Debt Expense
The ABC company had credit sales of $100,000. The
current accounts receivable balance is $30,510. The
allowance for doubtful accounts balance is $350.
Historically, 10 percent of the accounts receivable ending
balance is not collected.
35. The ABC company had credit sales of $100,000. The
current accounts receivable balance is $30,510. The
allowance for doubtful accounts balance is $350.
Historically, 10 percent of the accounts receivable ending
balance is not collected.
Bad Debt
Expense
350 Balance
Expense 2,701 2,701 Expense
End. Balance 2,701 3,051 End. Bal.
Allowance for
Doubtful Accounts
Example: Bad Debt Expense
36. Bad Debt Expense 2,701
Allowance for Doubtful Accounts 2,701
To adjust the Allowance account to desired balance.
The ABC company had credit sales of $100,000. The
current accounts receivable balance is $30,510. The
allowance for doubtful accounts balance is $350.
Historically, 10 percent of the accounts receivable ending
balance is not collected.
Bad Debt
Expense
350 Balance
Expense 2,701 2,701 Expense
End. Bal. 2,701 3,051 End. Bal.
Allowance for
Doubtful Accounts
Example: Bad Debt Expense
37. The XYZ Company had credit sales during the year of
$200,000. Using the Aging Method, determine the
journal entry needed. The beginning balance for the
Allowance for Doubtful accounts is $150.
Example 2: Bad Debt Expense
Percentage
Estimated to be
Age Balance Uncollectible Amount
Current.............. $10,000 1.5 $ 150
1-30 days.......... 4,000 4.0 160
31-90 days........ 2,100 20.0 420
Over 90 days..... 1,000 40.0 400
$17,000 $1,130
38. The XYZ Company had credit sales during the year of
$200,000. Using the Aging Method, determine the
journal entry needed. The beginning balance for the
Allowance for Doubtful accounts is $150.
Uncollectible
Account
Expense
Allowance for
Doubtful Accounts
150 Balance
Expense 980 980 Expense
End. Bal. 1,130 End. Bal.
Example 2: Bad Debt Expense
980
39. The XYZ Company had credit sales during the year of
$200,000. Using the Aging Method, determine the
journal entry needed. The beginning balance for the
Allowance for Doubtful accounts is $150.
Uncollectible
Account
Expense
Allowance for
Doubtful Accounts
150 Balance
Expense 980 980 Expense
End. Bal. 980 1,130 End. Bal.
Uncollectible Account Expense 980
Allowance for Doubtful Accounts 980
To adjust the Allowance account to desired balance.
Example 2: Bad Debt Expense
40. The ABC company had credit sales during the
year of $100,000. They estimate that 3% of all
credit sales will be uncollectible. Assuming the
allowance for doubtful accounts has a debit
balance of $ 1,000 what entry is necessary?
Accounting for Uncollectible Receivables
(Percentage of Credit Sales)
41. The ABC company had credit sales during the
year of $100,000. They estimate that 3% of all
credit sales will be uncollectible. Assuming the
allowance for doubtful accounts has a debit
balance of $ 1,000 what entry is necessary?
Uncollectible Accounts Expense 4,000
Allowance for Uncollectible Accounts 4,000
To record estimated uncollectible accounts for the
year.
Accounting for Uncollectible Receivables
(Percentage of Credit Sales)
42. Accounts Receivable Turnover--A measure used
to determine a company’s average collection
period for receivables. Computed by dividing net
sales (credit sales) by average accounts
receivables.
43. • Accounts Receivable Turnover
• Number of Days in Receivables--A
measure of the average number of days
it takes to collect a credit sale. It is
computed by dividing 365 days by the
accounts receivable turnover.
Assessing Management of Receivables
44. Example
The Wheeler Company had Net Credit Sales
of $150,000 during 2009. The accounts
receivables increased $5,000 to $40,000
during the same time. Calculate the Accounts
Receivable Turnover and Number of Days in
Receivables.
45. The Wheeler Company had Net Credit Sales
of $150,000 during 2009. The accounts
receivables increased $5,000 to $40,000
during the same time. Calculate the Accounts
Receivable Turnover and Number of Days in
Receivables.
Accounts Receivable Turnover:
Net Sales $150,000 = 4.0
Average Accounts Receivable $ 37,500
Example
46. Number of Days in Receivables:
Number of Days 365 = 91.25
Accounts Receivable Turnover 4.0
The Wheeler Company had Net Credit Sales
of $150,000 during 2009. The accounts
receivables increased $5,000 to $40,000
during the same time. Calculate the Accounts
Receivable Turnover and Number of Days in
Receivables.
Example
47. A written promise that allows someone to pay a
certain amount of money on or before a
specific future date.
Notes are classified as current or long-term
assets, depending on the due date.
48. Maker--The individual who signs the note and
assumes responsibility.
Payee--The person to whom payment is made.
Principal--The face amount of the note.
Maturity Date--The date the note becomes due.
Interest Rate--Annualized percentage of the
principal the maker is charged to borrow money.
Interest--The cost of borrowing money.
Notes Receivable -- Components
53. Example: Interest
The Ohio Company signed a 90-day, $5,000 note
payable to the Florida Company in settlement of
existing accounts payable. The interest rate of the
agreement is 14 percent. Calculate the interest
cost.
54. The Ohio Company signed a 90-day, $5,000 note
payable to the Florida Company in settlement of
existing accounts payable. The interest rate of the
agreement is 14 percent. Calculate the interest
cost.
Principal x Interest Rate x Time = Interest
$5,000 x 0.14 x 90/365 = $172.60
What journal entries are required for the Ohio
Company? For the Virginia Company?
Example: Interest
56. Accept Note:
Note Receivable............... 5,000.00
Accounts Receivable.. 5,000.00
Collect Note Plus Interest:
Cash................................. 5,172.60
Note Receivable......... 5,000.00
Interest Revenue........ 172.60
The Virginia Company--Payee
Journalizing Notes Receivable
57. Receivables are sold to factoring companies for
cash.
The factoring companies charge a percentage
of the receivable as a service cost.
Factoring allows companies to receive cash
now, instead of waiting to collect on the
receivable.
