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Accounting Practices 501 Chapter 8 Balance Day Adjustments (Bad Debts)

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Presentation on theme: "Accounting Practices 501 Chapter 8 Balance Day Adjustments (Bad Debts)"— Presentation transcript:

1 Accounting Practices 501 Chapter 8 Balance Day Adjustments (Bad Debts)

2 Credit Sales Ch8D - Bad debts 2 Why would a business sell on credit? Many entities rely on credit sales as basis of their operations To generate more sales

3 Credit Sales Ch8D - Bad debts 3 What would the cost be of selling on credit? Bad Debts! Many entities rely on credit sales as basis of their operations

4 Accounts Receivable Ch8D - Bad debts 4 We can now look at the accounting entries for Bad Debts

5 Back to the Accounting Equation Ch8D - Bad debts 5 Sold goods on credit to Mrs. Shopalot for $9,200 Accounts Receivable +9,200 Sales +8,000+1,200 GST collected

6 Back to the Accounting Equation Ch8D - Bad debts 6 Accounts Receivable +9,200 Sales +8,000+1,200 GST collected Mrs. Shopalot cannot repay half of her debt and a decision is made to write it off as irrecoverable

7 Back to the Accounting Equation Ch8D - Bad debts 7 Accounts Receivable +9,200 Sales +8,000+1,200 GST collected We create a Bad Debt expense account (if there isn’t already an existing one) and write the amount off Bad Debts -4,600+4,000 Half of the GST Collected, recorded at the time of the sale, will have to be reversed +600 GST paid

8 Back to the Accounting Equation Ch8D - Bad debts 8 Accounts Receivable +9,200 Sales +8,000+1,200 GST collected Bad Debts -4,600+4, GST paid Let’s do the General Journal entry for the Bad Debts

9 Back to the Accounting Equation Ch8D - Bad debts 9 Accounts Receivable +9,200 Sales +8,000+1,200 GST collected Bad Debts -4,600+4, GST paid General Journal Date Account Titles Ref noDebitCredit 31/3 Bad Debts4,000 Acc Receivable (Mrs Shopalot) 4,600 Being entry to write off half of Mrs Shopalot’s debt GST paid 600

10 Ch8D - Bad debts 10 General Journal Date Account Titles Ref noDebitCredit 31/3 Bad Debts4,000 Acc Receivable (Mrs Shopalot) 4,600 Being entry to write off half of Mrs Shopalot’s debt GST paid 600 Mrs. Shopalot’s account in the Subsidiary Ledger will be updated and the Accounts Receivable control account in the General Ledger will be updated

11 What about Bad Debts recovered? Ch8D - Bad debts 11 It sometimes happens that Bad Debts are recovered. What then?

12 Back to the Accounting Equation Ch8D - Bad debts 12 Mrs. Shopalot inherits some money and is able to repay her debt that was written off in the previous accounting period

13 Back to the Accounting Equation Ch8D - Bad debts 13 Accounts Receivable Bad debts recovered GST collected Firstly we have to reinstate her debt of $4,600 and then record her payment +4,600+4,

14 Back to the Accounting Equation Ch8D - Bad debts 14 Accounts Receivable Bad debts recovered GST collected +4,600+4, Let’s do the General Journal entry

15 Back to the Accounting Equation Ch8D - Bad debts 15 Accounts Receivable Bad debts recovered GST collected +4,600+4, General Journal Date Account Titles Ref noDebitCredit 31/3 Acc Receivable (Mrs Shopalot)4,600 Bad debts recovered 4,000 Being entry to reinstate Mrs Shopalot’s debt previously written off GST collected 600

16 Back to the Accounting Equation Ch8D - Bad debts 16 Now her payment of $4,600 will be recorded in the Cash Receipts Journal General Journal Date Account Titles Ref noDebitCredit 31/3 Acc Receivable (Mrs Shopalot)4,600 Bad debts recovered 4,000 Being entry to reinstate Mrs Shopalot’s debt previously written off GST collected 600

17 Back to the Accounting Equation Ch8D - Bad debts 17 General Journal Date Account Titles Ref noDebitCredit 31/3 Acc Receivable (Mrs Shopalot)4,600 Bad debts recovered 4,000 Being entry to reinstate Mrs Shopalot’s debt previously written off GST collected 600 Date Cash Receipts Journal Details RefBank Acc Rec Acc Rec (Mrs Shopalot) 4,600 GST collected

18 Subsidiary Ledger account of Mrs Shopalot Ch8D - Bad debts 18 Date Accounts Receivable Subsidiary ledger Details Ref no Bal Mrs Shopalot Sales 9,200Dr Bad Debts4,600 Dr Cr 9,200 Mrs Shopalot’s ledger account is now shown

19 Subsidiary Ledger account of Mrs Shopalot Ch8D - Bad debts 19 Date Accounts Receivable Subsidiary ledger Details Ref no Bal Mrs Shopalot Sales 9,200Dr Bad Debts4,600 Dr Cr 9,200 Bad Debts recovered4,600 Dr Cash receipts4,600NIL Cash receipts4,600NIL Let’s say that she paid the outstanding amount owed


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