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14- 1 Accounting For Bad Debts Chapter 14. 14- 2 Learning Objective 1 Describing how the Bad Debts Expense account and the Allowance for Doubtful Accounts.

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Presentation on theme: "14- 1 Accounting For Bad Debts Chapter 14. 14- 2 Learning Objective 1 Describing how the Bad Debts Expense account and the Allowance for Doubtful Accounts."— Presentation transcript:

1 14- 1 Accounting For Bad Debts Chapter 14

2 14- 2 Learning Objective 1 Describing how the Bad Debts Expense account and the Allowance for Doubtful Accounts account are used to record bad debts.

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

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

5 14- 5 Learning Unit 14-1 n An estimate is made as to how many of the current accounting period’s sales will be uncollectible. n 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.

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

7 14- 7 Accounts Affected Category Rules Bad Debt ExpenseExpense Dr. Allowance forContra- Cr. Doubtful AccountsAsset Bad Debt ExpenseExpense Dr. Allowance forContra- Cr. Doubtful AccountsAsset Learning Unit 14-1

8 14- 8 Learning Objective 2 Using the income statement approach and the balance sheet approach to estimate the amount of Bad Debts Expense.

9 14- 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.

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

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

12 Learning Objective 3 Preparing an Aging of Accounts Receivable.

13 Allowance for Uncollectible Accounts Length Amount % 1-30$100,0001$ 1, ,0003 2, ,0007 4, ,0009 3,600 Total$280,000$11,200 Accounts Receivable Aging of Receivables Example

14 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. 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. Learning Unit 14-2

15 Assume that the Allowance account has a credit balance of 1,000. Dec 31, 200x Bad Debt Expense 11,200 Allowance for Doubtful Accounts 11,200 Record estimate of bad debts Dec 31, 200x Bad Debt Expense 11,200 Allowance for Doubtful Accounts 11,200 Record estimate of bad debts Learning Unit 14-2

16 Learning Unit 14-2 Bad Debt Expense 10,200 Allowance for Doubtful Accounts 10,200 To record allowance for uncollectibles What is the adjusting entry?

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

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

19 Accounts Receivable, John DoeXXX Allowance for Doubtful AccountsXXX To reinstate John Doe’s account Accounts Receivable, John DoeXXX Allowance for Doubtful AccountsXXX To reinstate John Doe’s account CashXXX Accounts Receivable, John DoeXXX To record payment CashXXX Accounts Receivable, John DoeXXX To record payment Learning Unit 14-3 n How do we record a recovered debt?

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

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

22 Accounts Receivable, John DoeXXX Bad Debts RecoveredXXX Accounts Receivable, John DoeXXX Bad Debts RecoveredXXX CashXXX Accounts Receivable, John DoeXXX CashXXX Accounts Receivable, John DoeXXX Learning Unit 14-3 n How do we record a recovered debt using the direct method?

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

24 End of Chapter 14


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