- An account receivable represents money owed to a company for goods or services sold on credit. When an account receivable becomes uncollectible, it is recorded as a bad debt expense. - There is an upside to offering credit sales by encouraging purchases, but there is a downside in that some customers will delay payment or not pay at all, creating bad debts. - Companies must investigate outstanding accounts receivable to identify bad debts, which are difficult to determine if a customer is merely late or unable to pay. Accounting standards provide two methods to account for doubtful accounts and bad debts.

1. Accounting
Account Receivable
Presentation

2. Accounting for Receivables
• 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.

3. For Example:
Assume merchandise is sold on account for $1,000. The
terms of the agreement were 2/10, n/30. The entries are
as follows:
 Accounts Receivable 1,000
Sales Revenue 1,000

4. Uncollectible Accounts
Some receivables will never be
collected and must be written off as
uncollectible.

5. Uncollectible Accounts 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.

6. DEFINITION OF 'BAD DEBT'
• A debt that is not collectible and therefore worthless to the creditor.
This occurs after all attempts are made to collect on the debt. Bad
debt is usually a product of the debtor going into bankruptcy or
where the additional cost of pursuing the debt is more than the
amount the creditor could collect. This debt, once considered to be
bad, will be written off by the company as an expense.

7. There is an upside and a downside to selling goods and services to customers on
credit. The upside is that selling on credit encourages people to buy. For the most
part, people pay their bills when they are due. The downside is that there will
inevitably be customers who will either delay paying their bills or will never pay.
The latter are referred to as Bad Debts.
All businesses must investigate outstanding accounts receivable in order to
identify and account for bad debts. This can be challenging because it is
sometimes difficult to know whether the customer is late with the payment or is
unable to pay. Assumptions must be made in this regard, because the records need
to reflect the company’s current financial position as accurately as possible.
Generally Accepted Accounting Principles (GAAP) provides two accounting
methods for doubtful accounts and bad debts: the direct (write-off ) method and
the allowance method.