Accounting For Bad Debts Chapter 13

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

Learning Unit 13-1 (Accrual Accounting and Bad Debts) Companies that offer credit sales will be unable to collect from some customers. Some credit sales end up as bad debts.

Learning Unit 13-1 (Accrual Accounting and 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.

Learning Unit 13-1 (Accrual Accounting and Bad Debts) An estimate is made as to how many of the current sales will be uncollectible. The Allowance for Bad Debts (Allowance for Doubtful Accounts) is a contra-account to Accounts Receivable.

Learning Unit 13-1 (Accrual Accounting and Bad Debts) The 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.

Learning Unit 13-1 (Accrual Accounting and Bad Debts) Accounts Affected Category Rules Bad Debt Expense Expense Dr. 4,000 Allowance for Contra- Cr. 4,000 Doubtful Accounts asset December 31 Bad Debt Expense 1,600 Allowance for Doubtful Accounts 1,600 To record estimate of bad debts

Learning Unit 13-1 (Accrual Accounting and Bad Debts) Abby Ellen Company Partial Balance Sheet December 31, 20x1 Current Assets: Cash $ 51,400 Accounts receivable $100,000 Less: Allowance for doubtful accounts 1,600 98,400 Merchandise inventory 200,000 Total current assets $349,800

Learning Unit 13-1 (Accrual Accounting and Bad Debts) Writing off an account Allowance for Doubtful Accounts 200 Accounts Receivable, J. Moore 200 Writing off J. Moore account

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

Learning Unit 13-2 (Income Statement Approach) Adjusting entries to record the Bad Debts Expense are based on a percentage of net credit sales. The percentage used is based on past history. 7

Learning Unit 13-2 (Income Statement Approach) The credit department estimates that uncollectible-account expense is 1% of net credit sales, which were $80,000 for 20x4. December 31 Bad Debts Expense 800 Allowance for Doubtful Accounts 800 To record estimate of bad debts (.01 × $80,000)

Learning Unit 13-2 (Income Statement Approach) Any existing balance in the Allowance account is ignored. Accounts Receivable Bal. 7,000 Allowance for Doubtful Accounts 100 800 Adj. 900 Bal.

Learning Unit 13-2 (Balance Sheet Approach) Adjusting entries are based on bringing the Allowance account to a required amount. This method is a balance-sheet approach because it focuses on accounts receivable. 7

of Accounts Receivable. Learning Objective 3 Preparing an Aging of Accounts Receivable.

Learning Unit 13-2 (Balance Sheet Approach) Not Yet Due Days Past Due 1-30 days 31-60 days 61-90 days Over 90 Accounts Receivable $3,600 2,000 870 200 330 $7,000 Estimated % Bad Debt Expense 3 4 10 20 50 Allowance for Doubtful $108 80 87 40 165 $480 Less current balance Adjusting entry –100 $380

Learning Unit 13-2 (Balance Sheet Approach) 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 13-2 (Balance Sheet Approach) Bad Debts Expense 380 Allowance for Doubtful Accounts ($480 – $100) 380 Recorded expense for the year Accounts Receivable Bal. 7,000 Allowance for Doubtful Accounts 100 380 Adj. 480 Bal.

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

Learning Unit 13-3 (Writing Off and Recovering) Suppose that in 20x7, the Abby Ellen Company determines that the account of Jill Sullivan for $900 is uncollectible. The account must be written off. How?

Learning Unit 13-3 (Writing Off and Recovering) Allowance for Doubtful Accounts 900 Accounts Receivable, Jill Sullivan 900 Wrote off Sullivan account 9

Learning Unit 13-3 (Writing Off and Recovering) How is a recovered debt recorded? Accounts Receivable, John Doe XXX Allowance for Doubtful Accounts XXX To reinstate John Doe’s account Cash XXX Accounts Receivable, John Doe XXX To record payment

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

Learning Unit 13-3 (Writing Off and Recovering) How do we write off an account using the direct write-off method? Bad Debt Expenses XXX Accounts Receivable, John Doe XXX To write off John Doe’s account

Learning Unit 13-3 (Writing Off and Recovering) How do we record a recovered debt using the direct method? Accounts Receivable, John Doe XXX Bad Debts Recovered XXX Cash XXX Accounts Receivable, John Doe XXX

Learning Unit 13-3 (Writing Off and Recovering) How do we record a recovered debt the same year it was written off? Accounts Receivable, John Doe XXX Bad Debts Expense XXX To reinstate John Doe’s account Cash XXX Accounts Receivable, John Doe XXX Received payment

End of Chapter 13