Receivables are amounts owed to a company by customers or other debtors. The most significant type is accounts receivable, which is owed by customers for goods or services sold on account and expected to be collected within 30-60 days. There are two main methods for accounting for uncollectible receivables - the direct write-off method and the allowance method. The allowance method is required for financial reporting when bad debts are material. It estimates uncollectible receivables at the end of each period and matches bad debt expense to the period revenues were earned, ensuring receivables are reported at their net realizable value. Actual uncollectibles are debited to the allowance account and credited to receivables, while

1. Receivables –Amountsdue fromindividualsandcompanies.Claimsexpectedtobe collectedincash
AccountsReceivables –owedbycustomersfromsalesof goodsand services –expectedtocollected
within30 -60 days– mostsignificanttype of claimheld bycompany
NotesReceivables –Claimsforwhichformal instrumentsof creditare issuedasevidence of debt –
normallyrequirespaymentof interestandextendsfortime periodsof 60-90 daysor longer
OtherReceivables –Include non-operational items –non-trade includinginterestreceivable,loansto
companyofficers,advancestoemployees,andincome taxesrefundable –reportedasseparate itemson
balance sheet
Service organizationsrecordaccountsreceivablewhenservice hasbeenprovidedonaccount
Merchandisersrecordaccountsreceivable atpointof sale of merchandise onaccount
Receivablesmaybe reducedbysalesdiscountsandorsalesreturns.
MethodsFor Bad Debt
Creditlossesare debitedtoBadDebtExpense orUncollectible AccountsExpense
Methodsto account forUncollectible accounts:
Directwrite-off Method: Baddebtlossesare notestimated –Noallowance accountisused – Accounts
are writtenoff whendetermineduncollectibleasfollows- baddebtsexpenseswill show onlyactual
losses– accountsreceivableswillbe reportedatgrossamount
Bad DebtExpense will show onlythe actual lossesfromuncollectibles –oftenrecordedinaperiod
differentfromthe periodinwhichthe revenuewasrecorded –no attemptismade to match bad debt
expense tosalesrevenuesinthe income statementortoshow accounts receivable inthe balance sheet
at the amountactuallyexpectedtobe received –unlessbaddebtlossesare insignificant,the direct
write-off methodisnotacceptable forfinancial reporting purposes.
Allowance Method:
Providesbettermatchingonthe income statementandensuresthatreceivablesare statedattheircash
(net) realizable value.
Cash (net) realizablevalue isthe netamountexpectedtobe receivedincash – itexcludesamounts that
the companyestimatesitwill notcollect.

2. Receivablesare thereforereducedbyestimateduncollectiblereceivablesonthe balance sheetthrough
use of the allowance method
Requiredforfinancial reportingpurposeswhenbaddebtsare material inamount–Uncollectible
accounts receivableare estimatedandmatchedagainstrevenuesinthe same accountingperiodin
whichthe revenuesoccurred.
Estimateduncollectiblesare recordedasan increase (adebit) toBad DebtExpense andanincrease (a
credit) toAllowance forDoubtful Accounts(acontraassetaccount) throughan adjustingentryat the
endof eachperiod.
Actual uncollectiblesare debitedtoAllowanceforDoubtful AccountsandcreditedtoAccounts
Receivableatthe time the specificaccountiswrittenoff asuncollectible
1)
Underthe Allowance methodof accounting for bad debts actual uncollectiblesare debitedto
“Allowance forDoubtful Accounts” and creditedto Accounts Receivable.Estimateduncollectiblesare
debitedto Bad Debts Expense and creditedto Allowance for Doubtful Accounts. Writingoffan
account doesnot change the cash realizable value ofreceivablesreportedon the balance sheet.
WileyPlusChapter8 Interactive Tutorial Frame 30 of 58 “AccountingFor Bad Debt”