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© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater Accounting for Bad Debts Chapter 13.

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Presentation on theme: "© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater Accounting for Bad Debts Chapter 13."— Presentation transcript:

1 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater Accounting for Bad Debts Chapter 13

2 Learning Objective 1 Describing how the Bad Debts Expense account and the Allowance for Doubtful Accounts account are used to record bad debts © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-1

3 Bad Debts Debts that come from credit customers who do not pay their bills Affects a company’s credit policy Cannot grant credit to just any company © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-1

4 Bad Debts On December 1, 2008, Corey Co. sold merchandise on account for $5,000. On July 1, 2009, Corey Co. determines that the $5,000 will never be collected. © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater Dec 1 Sales of $5,000 recorded Dec 31 End of fiscal year Jul 1 Debt determined to be bad LO-1

5 Bad Debts Bad debts expense should be recognized in the accounting period in which the sales were made. © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater Dec 1 Sales of $5,000 recorded Dec 31 End of fiscal year Jul 1 Debt determined to be bad LO-1

6 Bad Debts Solution: Estimate how many of the current sales will be uncollectible © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater Dec 1 Sales of $5,000 recorded Dec 31 End of fiscal year Jul 1 Debt determined to be bad Prepare an adjusting entry LO-1

7 Allowance for Doubtful Accounts Is a contra-asset account Is subtracted from accounts receivable Accumulates expected amount of uncollectibles as of a given date © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-1

8 Adjusting Entry for Bad Debts © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater General Journal Page 8 DateAccount Titles and Description PRDr.Cr. Dec 31 Bad Debts Expense XXXX Allowance for Doubtful Accounts XXXX Contra-Asset Account LO-1

9 Balance Sheet Presentation © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater Current Assets: Cash$ 10,400 Accounts receivable$100,000 Less: Allowance for doubtful accounts 6,000 94,000 Merchandise inventory 300,000 Total current assets$404,400 Corbin Company Partial Balance Sheet December 31, 200X Gross Amount Estimated to be Uncollectible Net Realizable Value Total Current Assets LO-1

10 Net Realizable Value © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater The amount of Accounts Receivable that is expected to be collected Calculated by subtracting Allowance for Doubtful Accounts from Accounts Receivable LO-1

11 Writing off an account © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-1 General Journal Page 8 DateAccount Titles and Description PRDr.Cr. Jul 1 Allowance for Doubtful Accounts 5,000 Accounts Receivable-Discello 5,000

12 Learning Objective 2 Using the income statement approach and the balance sheet approach to estimate the amount of Bad Debts Expense © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-2

13 Estimating the Amount © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater General Journal Page 8 DateAccount Titles and DescriptionPRDr.Cr. Dec 31 Bad Debts Expense XXXX Allowance for Doubtful Accounts XXXX How is this amount determined? LO-2

14 Income Statement Approach Bad Debts Expense = Percentage of net credit sales © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater Focus is on measuring the expense, which is reported on Income Statement. LO-2 Matching requirement- ignores previous balance of Allowance for Doubtful Accounts when estimating Bad Debts Expense for current period.

15 Exercise 13-2 Compute Net Sales: Sales $110,000 Sales Returns & Allowances(500) Sales Discounts(9,500) Net Sales$100,000 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-2

16 Exercise 13-2 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-2

17 Exercise 13-2 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater General Journal Page 8 DateAccount Titles and Description PRDr.Cr. Dec 31 Bad Debts Expense 4,000 Allowance for Doubtful Accounts4,000 LO-2

18 Exercise 13-2 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater Accounts Receivable Bal. 30,000 Allowance for Doubtful Accounts 5,000 4,000 Adj. $9,000 Bal. Any existing balance in the Allowance account is ignored. LO-2

19 Balance Sheet Approach Adjusting entries are based on bringing the Allowance account to a required amount. Method is based on the Accounts Receivable amount and the aging process. © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-2

20 Balance Sheet Approach Net realizable value - The amount (accounts receivable – Allowance for doubtful accounts) that is expected to be collected. © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater Focus is on determining the net realizable value of Accounts Receivable, which is reported on Balance Sheet LO-2

21 Learning Objective 3 Preparing an Aging of Accounts Receivable © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-3

22 Example Mayfair Co. has the following balances in its accounts at the end of 2008 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater Accounts Receivable Bal. 30,000 Allowance for Doubtful Accounts 500 LO-3

23 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater The following aging schedule is prepared for the end of the year. Complete the schedule. LO-3

24 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater Example Accounts Receivable Bal. 30,000 Allowance for Doubtful Accounts 500 Desired balance 2,679 2,179 LO-3

25 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater What if the Allowance account had a debit balance of $500 before adjustment? Accounts Receivable Bal. 30,000 Allowance for Doubtful Accounts 500 Desired balance 2,679 3,179 LO-3

26 Learning Objective 4 Writing off an account using the Allowance for Doubtful Accounts method © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-4

27 Allowance for Doubtful Accounts When a company deems an account uncollectible, it is written off and no longer considers it an asset. When the journal entry is made, allowance for doubtful accounts and accounts receivable are reduced. Example: J. Monaco’s account balance of $500 is deemed uncollectible on June 1, 20X8. © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-4 General Journal Page 8 DateAccount Titles and DescriptionPRDr.Cr. 20X8 Jun1Allowance for Doubtful Accounts500 Accounts Receivable, J. Monaco 500

28 Recording Recovered Debts using Allowance for Doubtful Accounts Example: Assume J. Monaco paid half of his account balance of $500 on January 3, 20X9. © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-4 General Journal Page 8 DateAccount Titles and DescriptionPRDr.Cr. 20X9 Jan3 Accounts Receivable, J. Monaco250 Allowance for Doubtful Accounts 250 Restores collectible portion 3Cash250 Accounts Receivable, J. Monaco 250 Records payment received

29 Writing off an account using the Allowance for Doubtful Accounts account © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-2, 4 Exercise 13-4 (a)

30 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-2, 4 Exercise 13-4 (a) Accts. Rec., Angie Ring Accts. Rec., Mike Catuc

31 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-2, 4 Exercise 13-4 (a) Accts. Rec., Mike Catuc

32 Learning Objective 5 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-5 Using the direct write-off method

33 Direct Write-Off Method Used when a company cannot reasonably estimate bad debt expense Uncollectible accounts are directly written off to current year’s bad debt expense The year sale was made does not matter Allowance for doubtful accounts is not used © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-5

34 Direct Write-Off Method Example: T. DeStadio’s account balance of $400 is deemed to be uncollectible on May 15, 20X7. © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-5 General Journal Page 8 DateAccount Titles and DescriptionPRDr.Cr. 20X7 May15 Bad Debts Expense 400 Accounts Receivable, T DeStadio 400 Wrote off account

35 Direct Write-Off Method Recording Recovered Debts in same year Assume T. DeStadio paid $200 of his balance July 3, 20X7. Reverse the entry made prior by $200 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-5 General Journal Page 8 DateAccount Titles and DescriptionPRDr.Cr. 20X7 July3Accounts Receivable, T DeStadio 200 Bad Debts Expense 200

36 Direct Write-Off Method Recording Recovered Debts in different year A new account- Bad Debts Recovered is used Assume T. DeStadio paid $200 of his balance on July 3, 20X8. © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-5 General Journal Page 8 DateAccount Titles and DescriptionPRDr.Cr. 20X8 July3Accounts Receivable, T DeStadio 200 Bad Debts Recovered 200 Restores collectible portion 3Cash 200 Accounts Receivable, T DeStadio 200 Records payment received

37 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater Exercise 13-4 (b) LO-5 Accts. Rec., Angie Ring Accts. Rec., Mike Catuc

38 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater Exercise 13-4 (b) LO-5 Accts. Rec., Mike Catuc

39 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater End of Chapter 13


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