2 Describing how the Bad Debts Expense account and the Learning Objective 1Describing how the Bad DebtsExpense account and theAllowance for DoubtfulAccounts account are usedto 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 14-1An 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 14-1The 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 2Using the income statementapproach and the balancesheet approach to estimatethe 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 14-2Any existing balance in the Allowanceaccount is ignored.Dec 31, 200xBad Debt Expense XXXAllowance for Doubtful Accounts XXXRecord estimate of bad debts7
11 Learning Unit 14-2 Aging of Accounts Receivable Adjusting entries are based on bringingthe Allowance account to a required amount.7
12 of Accounts Receivable. Learning Objective 3Preparing an Agingof Accounts Receivable.
13 Aging of Receivables Example AccountsReceivableAllowance forUncollectibleAccountsLength Amount %$100, $ 1,000, ,400, ,200, ,600Total $280, $11,200
14 Learning Unit 14-2 The adjusting entry must include the amount that will leave an allowancebalance equal to the accountsreceivable that are not expectedto be collected.
15 Assume that the Allowance account Learning Unit 14-2Dec 31, 200xBad Debt Expense ,200Allowance for Doubtful Accounts ,200Record estimate of bad debtsAssume that the Allowance accounthas a credit balance of 1,000.8
16 What is the adjusting entry? Learning Unit 14-2What is the adjusting entry?Bad Debt Expense ,200Allowance forDoubtful Accounts ,200To record allowance for uncollectibles8
17 using the Allowance for Doubtful Accounts account. Learning Objective 4Writing off an accountusing the Allowance forDoubtful Accounts account.
18 Learning Unit 14-3How do we write off an account using the Allowance account?Allowance for Doubtful Accounts XXXAccounts Receivable, John Doe XXXTo write off John Doe’s account9
19 Learning Unit 14-3 How do we record a recovered debt? Accounts Receivable, John Doe XXXAllowance for Doubtful Accounts XXXTo reinstate John Doe’s accountCash XXXAccounts Receivable, John Doe XXXTo record payment9
20 Using the direct write-off method. Learning Objective 5Using the direct write-off method.
21 Learning Unit 14-3How do we write off an account using the direct write-off method?Bad Debt Expenses XXXAccounts Receivable, John Doe XXXTo write off John Doe’s account9
22 Learning Unit 14-3How do we record a recovered debt using the direct method?Accounts Receivable, John Doe XXXBad Debts Recovered XXXCash XXXAccounts Receivable, John Doe XXX9
23 Learning Unit 14-3How do we record a recovered debt the same year it was written off?Accounts Receivable, John Doe XXXBad Debts Expense XXXTo reinstate John Doe’s accountCash XXXAccounts Receivable, John Doe XXXReceived payment9