Receivables Chapter 9

Uncollectible Receivables Direct Write-Off Method records bad debt expense only when an account is determined to be worthless. Example: Assume a $3000 account receivable from Lou Main has been determined to be uncollectible. The entry to write off the account is as follows: Bad Debt Expense $3000 Accounts Receivable-Lou Main $3000

Uncollectible Receivables Direct Write-Off Method An account receivable that has been written off already may be collected later. The account is reinstated by an entry that reverses the write-off entry. The cash received in payment is then recorded as a receipt on account. Example: A/R – Lou Main $3000 Bad Debt Expense $3000 Cash $3000 A/R – Lou Main $3000

Uncollectible Receivables Allowance Method Records bad debt expense by estimating uncollectible accounts at the end of the accounting period. Example: A company estimates that $5000 will be uncollectible. Bad Debt Expense $5000 Allowance for Doubtful Accounts $5000

Uncollectible Receivables Allowance Method When a customer’s account is identified as uncollectible, it is written off against the allowance account. Example: A company determines that John Little’s account is uncollectible for $250. Allowance for Doubtful Accounts $250 A/R – John Little $250

Uncollectible Receivables Allowance Method An account receivable that has been written off already may be collected later. The account is reinstated by an entry that reverses the write-off entry. The cash received in payment is then recorded as a receipt on account. Example: A/R – John Little $250 Allowance for Doubtful Accounts $250 Cash $250 A/R – John Little $250

Estimating Uncollectibles Percent of Sales Method Uncollectible accounts can be estimated as a percent of credit sales. Example: Total Credit Sales $1,000,000 Balance of A/R $ 75,000 Balance of Allow. For Doubtful Accts $ 3,000 (cr) Bad Debt as a % of credit sales 1% Bad Debt Expense is: $1,000,000 x 1% = $10,000 Bad Debt Expense $10000 Allowance for Doubtful Accounts $10000

Estimating Uncollectibles Analysis of Receivables Method Assumes the longer an account receivable is outstanding, the less likely that it will be collected. The due date of each A/R is determined. The number of days each account is past due is determined. Each account is placed in an aged class according to its days past due. The totals for each aged class is determined. The total for each aged class is multiplied by an estimated % of uncollectible accounts for that class. The estimated total of uncollectible accounts is determined as the sum of the uncollectible accounts for each aged class.