1. Accounting For Bad Debts
Chapter 14

2. Describing how the Bad Debts Expense account and the
Learning Objective 1
Describing how the Bad Debts
Expense account and the
Allowance for Doubtful
Accounts account are used
to record bad debts.

3. Learning Unit 14-1 Bad debts are a danger when credit sales are
offered to customers.

4. Learning Unit 14-1 Some credit sales end up as bad debts.
These bad debts should be recognized in the accounting period in which the sales were made.
Usually, bad debts do not end up as uncollectible until a year or so later. 4

5. Learning Unit 14-1
An estimate is made as to how many of the current accounting period’s sales will be uncollectible.
A debit to Bad Debts Expense and a credit to a contra-asset account called Allowance for Bad Debts is the journal entry for this method. 5

6. Learning Unit 14-1
The allowance amount is subtracted from Accounts Receivable.
This leaves a net realizable value for the receivables.
The Allowance for Bad Debts account is debited and Accounts Receivable credited when an account is written off as a bad debt.

7. Learning Unit 14-1 Accounts Affected Category Rules
Bad Debt Expense Expense Dr.
Allowance for Contra Cr.
Doubtful Accounts Asset

8. Using the income statement approach and the balance
Learning Objective 2
Using the income statement
approach and the balance
sheet approach to estimate
the amount of Bad Debts Expense.

9. Learning Unit 14-2 Percentage of Sales
Adjusting entries are based on a % of net sales.
The percentage used is based on past history. 7

10. Any existing balance in the Allowance
Learning Unit 14-2
Any existing balance in the Allowance
account is ignored.
Dec 31, 200x
Bad Debt Expense XXX
Allowance for Doubtful Accounts XXX
Record estimate of bad debts 7

11. Learning Unit 14-2 Aging of Accounts Receivable
Adjusting entries are based on bringing
the Allowance account to a required amount. 7

12. of Accounts Receivable.
Learning Objective 3
Preparing an Aging
of Accounts Receivable.

13. Aging of Receivables Example
Accounts
Receivable
Allowance for
Uncollectible
Accounts
Length Amount %
$100, $ 1,000
, ,400
, ,200
, ,600
Total $280, $11,200

14. Learning Unit 14-2 The adjusting entry must include the
amount that will leave an allowance
balance equal to the accounts
receivable that are not expected
to be collected.

15. Assume that the Allowance account
Learning Unit 14-2
Dec 31, 200x
Bad Debt Expense ,200
Allowance for Doubtful Accounts ,200
Record estimate of bad debts
Assume that the Allowance account
has a credit balance of 1,000. 8

16. What is the adjusting entry?
Learning Unit 14-2
What is the adjusting entry?
Bad Debt Expense ,200
Allowance for
Doubtful Accounts ,200
To record allowance for uncollectibles 8

17. using the Allowance for Doubtful Accounts account.
Learning Objective 4
Writing off an account
using the Allowance for
Doubtful Accounts account.

18. Learning Unit 14-3
How do we write off an account using the Allowance account?
Allowance for Doubtful Accounts XXX
Accounts Receivable, John Doe XXX
To write off John Doe’s account 9

19. Learning Unit 14-3 How do we record a recovered debt?
Accounts Receivable, John Doe XXX
Allowance for Doubtful Accounts XXX
To reinstate John Doe’s account
Cash XXX
Accounts Receivable, John Doe XXX
To record payment 9

20. Using the direct write-off method.
Learning Objective 5
Using the direct write-off method.

21. Learning Unit 14-3
How do we write off an account using the direct write-off method?
Bad Debt Expenses XXX
Accounts Receivable, John Doe XXX
To write off John Doe’s account 9

22. Learning Unit 14-3
How do we record a recovered debt using the direct method?
Accounts Receivable, John Doe XXX
Bad Debts Recovered XXX
Cash XXX
Accounts Receivable, John Doe XXX 9

23. Learning Unit 14-3
How do we record a recovered debt the same year it was written off?
Accounts Receivable, John Doe XXX
Bad Debts Expense XXX
To reinstate John Doe’s account
Cash XXX
Accounts Receivable, John Doe XXX
Received payment 9

24. End of Chapter 14