Copyright © 1999 by M. Ray Gregg. All rights reserved. 1 Receivables Uncollectible Accounts.

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Copyright © 1999 by M. Ray Gregg. All rights reserved. 1 Receivables Uncollectible Accounts

Copyright © 1999 by M. Ray Gregg. All rights reserved. 2 Receivables Premise:

Copyright © 1999 by M. Ray Gregg. All rights reserved. 3 Receivables Premise: When you extend credit to customers…

Copyright © 1999 by M. Ray Gregg. All rights reserved. 4 Receivables Premise: When you extend credit to customers… you know some customers won’t pay.

Copyright © 1999 by M. Ray Gregg. All rights reserved. 5 Receivables Premise: When you extend credit to customers… you know some customers won’t pay. Solutions:

Copyright © 1999 by M. Ray Gregg. All rights reserved. 6 Receivables Premise: When you extend credit to customers… you know some customers won’t pay. Solutions: I.Notes Receivable and Interest

Copyright © 1999 by M. Ray Gregg. All rights reserved. 7 Premise: When you extend credit to customers… you know some customers won’t pay. Solutions: I.Notes Receivable and Interest II.Uncollectible Accounts Receivables

Copyright © 1999 by M. Ray Gregg. All rights reserved. 8 Receivables Premise: When you extend credit to customers… you know some customers won’t pay. Solutions: I.Notes Receivable and Interest II.Uncollectible Accounts Today

Copyright © 1999 by M. Ray Gregg. All rights reserved. 9 Receivables Premise: When you extend credit to customers… you know some customers won’t pay. Solutions: I.Notes Receivable and Interest II.Uncollectible Accounts Later

Copyright © 1999 by M. Ray Gregg. All rights reserved. 10 Uncollectible Accounts Doubtful Accounts Bad Debts

Copyright © 1999 by M. Ray Gregg. All rights reserved. 11 Allowance Direct Write-Off

Copyright © 1999 by M. Ray Gregg. All rights reserved. 12 Allowance Method Direct Write-Off Method Compare

Copyright © 1999 by M. Ray Gregg. All rights reserved. 13 Allowance Method Advance provision for estimate of accounts thought to be uncollectible

Copyright © 1999 by M. Ray Gregg. All rights reserved. 14 1/112/31 Total Sales

Copyright © 1999 by M. Ray Gregg. All rights reserved. 15 1/112/25 Total Sales

Copyright © 1999 by M. Ray Gregg. All rights reserved. 16 1/112/31 R

Copyright © 1999 by M. Ray Gregg. All rights reserved. 17 1/112/31 R 3/31 Our Company Our Address Our City, State Zip Our Customer Customer’s Address City, State Zip

Copyright © 1999 by M. Ray Gregg. All rights reserved. 18 1/1 R 4/30 Our Company Our Address Our City, State Zip Our Customer Customer’s Address City, State Zip 12/31

Copyright © 1999 by M. Ray Gregg. All rights reserved. 19 1/1 R 5/31 Our Company Our Address Our City, State Zip Our Customer Customer’s Address City, State Zip 12/31

Copyright © 1999 by M. Ray Gregg. All rights reserved. 20 1/1 R 5/31 Our Company Our Address Our City, State Zip Our Customer Customer’s Address City, State Zip E Is that matching? 12/31

Copyright © 1999 by M. Ray Gregg. All rights reserved. 21 1/1 R 5/31 Our Company Our Address Our City, State Zip Our Customer Customer’s Address City, State Zip E 12/31

Copyright © 1999 by M. Ray Gregg. All rights reserved. 22 Allowance Method Advance provision for estimate of accounts thought to be uncollectible A.Advantages 1.Provides better matching of expenses with time period I.S. Benefi t

Copyright © 1999 by M. Ray Gregg. All rights reserved. 23 Good Company Balance Sheet December 31, xxxx ASSETS Current Assets Cash$10,000 Accounts Receivable30,000 Merchandise Inventory40,000 Supplies3,000 Prepaid Insurance 7,000 Total Current Assets$90,000

Copyright © 1999 by M. Ray Gregg. All rights reserved. 24 Good Company Balance Sheet December 31, xxxx ASSETS Current Assets Cash$10,000 Accounts Receivable30,000 Merchandise Inventory40,000 Supplies3,000 Prepaid Insurance 7,000 Total Current Assets$90,000

Copyright © 1999 by M. Ray Gregg. All rights reserved. 25 Receivables Premise: When you extend credit to customers… you know some customers won’t pay.

Copyright © 1999 by M. Ray Gregg. All rights reserved. 26 Good Company Balance Sheet December 31, xxxx ASSETS Current Assets Cash$10,000 Accounts Receivable $30,000 Less: ??? ??? ? ? ? Merchandise Inventory40,000 Supplies3,000 Prepaid Insurance 7,000 Total Current Assets$90,000

Copyright © 1999 by M. Ray Gregg. All rights reserved. 27 Allowance Method Advance provision for estimate of accounts thought to be uncollectible A.Advantages 1.Provides better matching of expenses with time period 2.Reduces value of receivables to the amount of cash expected to be collected

Copyright © 1999 by M. Ray Gregg. All rights reserved. 28 Allowance Method Advance provision for estimate of accounts thought to be uncollectible A.Advantages 1.Provides better matching of expenses with time period 2.Reduces value of receivables to the amount of cash expected to be collected I.S. Benefi t B.S. Benefit How ?

Copyright © 1999 by M. Ray Gregg. All rights reserved. 29 Allowance Method B.Provision for estimate at year end:

Copyright © 1999 by M. Ray Gregg. All rights reserved. 30 Allowance Method B.Provision for estimate at year end: What kind of an account is Allowance for Doubtful Accounts? Bad Debts Expense est Allow for Doubtful Acctsest B.S. Benefit I.S. Benefit

Copyright © 1999 by M. Ray Gregg. All rights reserved. 31 Good Company Balance Sheet December 31, xxxx ASSETS Current Assets Cash$10,000 Accounts Receivable $30,000 Less: Allow for D. A. 3,00027,000 Merchandise Inventory40,000 Supplies3,000 Prepaid Insurance 7,000 Total Current Assets$87,000 What kind of an account is Allowance for Doubtful Accounts?

Copyright © 1999 by M. Ray Gregg. All rights reserved. 32 Allowance Method B.Provision for estimate at year end: What kind of an account is Allowance for Doubtful Accounts? Bad Debts Expense est Allow for Doubtful Acctsest Contra Asset or Contra Receivables

Copyright © 1999 by M. Ray Gregg. All rights reserved. 33 Allowance Method B.Provision for estimate at year end: Why use a contra account? Bad Debts Expense est Allow for Doubtful Acctsest Accounts Receivable

Copyright © 1999 by M. Ray Gregg. All rights reserved. 34 Allowance Method B.Provision for estimate at year end: Why use a contra account? Bad Debts Expense est Allow for Doubtful Acctsest Do not know which customers will not pay -- using subsidiary ledger.

Copyright © 1999 by M. Ray Gregg. All rights reserved. 35 Good Company Balance Sheet December 31, xxxx ASSETS Current Assets Cash$10,000 Accounts Receivable $30,000 Less: Allow for D. A. 3,00027,000 Merchandise Inventory40,000 Supplies3,000 Prepaid Insurance 7,000 Total Current Assets$87,000 “Cash Realizable Value”

Copyright © 1999 by M. Ray Gregg. All rights reserved. 36 Allowance Method B.Provision for estimate at year end: Bad Debts Expense est Allow for Doubtful Acctsest

Copyright © 1999 by M. Ray Gregg. All rights reserved. 37 Allowance Method C.Estimate may be based on: 1.Revenue 2.Receivables I.S. View B.S. View

Copyright © 1999 by M. Ray Gregg. All rights reserved. 38 debit Bad Debts Expense to write off an account direct write off Method allowance year-end AJE revenue receivables % x total sales % x sales on account % x bal. of A/Rec. aging results consider bal. of allowance acct Uncollectible Accounts

Copyright © 1999 by M. Ray Gregg. All rights reserved. 39 debit Bad Debts Expense to write off an account direct write off Method allowance year-end AJE revenue receivables % x total sales % x sales on account % x bal. of A/Rec. aging results consider bal. of allowance acct Uncollectible Accounts

Copyright © 1999 by M. Ray Gregg. All rights reserved. 40 debit Bad Debts Expense to write off an account direct write off Method allowance year-end AJE revenue receivables % x total sales % x sales on account % x bal. of A/Rec. aging results consider bal. of allowance acct Uncollectible Accounts

Copyright © 1999 by M. Ray Gregg. All rights reserved. 41 debit Bad Debts Expense to write off an account direct write off Method allowance year-end AJE revenue receivables % x total sales % x sales on account % x bal. of A/Rec. aging results consider bal. of allowance acct Uncollectible Accounts

Copyright © 1999 by M. Ray Gregg. All rights reserved. 42 debit Bad Debts Expense to write off an account direct write off Method allowance year-end AJE revenue receivables % x total sales % x sales on account % x bal. of A/Rec. aging results consider bal. of allowance acct Uncollectible Accounts

Copyright © 1999 by M. Ray Gregg. All rights reserved. 43 debit Bad Debts Expense to write off an account direct write off Method allowance year-end AJE revenue receivables % x total sales % x sales on account % x bal. of A/Rec. aging results consider bal. of allowance acct Uncollectible Accounts

Copyright © 1999 by M. Ray Gregg. All rights reserved. 44 debit Bad Debts Expense to write off an account direct write off Method allowance year-end AJE revenue receivables % x total sales % x sales on account % x bal. of A/Rec. aging results consider bal. of allowance acct Uncollectible Accounts

Copyright © 1999 by M. Ray Gregg. All rights reserved. 45 debit Bad Debts Expense to write off an account direct write off Method allowance year-end AJE revenue receivables % x total sales % x sales on account % x bal. of A/Rec. aging results consider bal. of allowance acct Uncollectible Accounts

Copyright © 1999 by M. Ray Gregg. All rights reserved. 46 debit Bad Debts Expense to write off an account direct write off Method allowance year-end AJE revenue receivables % x total sales % x sales on account % x bal. of A/Rec. aging results consider bal. of allowance acct Uncollectible Accounts

Copyright © 1999 by M. Ray Gregg. All rights reserved. 47 Example of Aging AgeEstimate Less than 30 days98% 30 – 60 days85% 60 – 90 days70% 90 – 120 days50% Over 120 days25%

Copyright © 1999 by M. Ray Gregg. All rights reserved. 48 debit Bad Debts Expense to write off an account direct write off Method allowance year-end AJE revenue receivables % x total sales % x sales on account % x bal. of A/Rec. aging results consider bal. of allowance acct Uncollectible Accounts consider bal. of allowance account

Copyright © 1999 by M. Ray Gregg. All rights reserved. 49 debit Bad Debts Expense to write off an account direct write off Method allowance year-end AJE revenue receivables % x total sales % x sales on account % x bal. of A/Rec. aging results consider bal. of allowance acct Uncollectible Accounts Income Statement View

Copyright © 1999 by M. Ray Gregg. All rights reserved. 50 debit Bad Debts Expense to write off an account direct write off Method allowance year-end AJE revenue receivables % x total sales % x sales on account % x bal. of A/Rec. aging results consider bal. of allowance acct Uncollectible Accounts Balance Sheet View

Copyright © 1999 by M. Ray Gregg. All rights reserved. 51 debit Bad Debts Expense to write off an account direct write off Method allowance year-end AJE revenue receivables % x total sales % x sales on account % x bal. of A/Rec. aging results consider bal. of allowance acct Uncollectible Accounts

Copyright © 1999 by M. Ray Gregg. All rights reserved. 52 Allowance Method C.Estimate may be based on: 1.Revenue (I.S. view) 2.Receivables (B.S. view) D.Write off an account: Allow for Doubtful Accts bal Accts Rec - Customerbal

Copyright © 1999 by M. Ray Gregg. All rights reserved. 53 Allowance Method C.Estimate may be based on: 1.Revenue (I.S. view) 2.Receivables (B.S. view) D.Write off an account: Allow for Doubtful Accts bal Accts Rec - Customerbal E.Reinstate if collected: Accts Rec - Customer col Allow for Doubtful Accts col record cash collection as usual

Copyright © 1999 by M. Ray Gregg. All rights reserved. 54 Direct Write-Off Method Expense recognized when account determined to be worthless

Copyright © 1999 by M. Ray Gregg. All rights reserved. 55 1/1 R 5/31 Our Company Our Address Our City, State Zip Our Customer Customer’s Address City, State Zip E 12/31

Copyright © 1999 by M. Ray Gregg. All rights reserved. 56 Direct Write-Off Method Expense recognized when account determined to be worthless A.Advantage:simplicity B.No AJE at year end C.No estimate

Copyright © 1999 by M. Ray Gregg. All rights reserved. 57 Direct Write-Off Method D.Write off an account: Bad Debts Expense bal Accts Rec - Customerbal

Copyright © 1999 by M. Ray Gregg. All rights reserved. 58 debit Bad Debts Expense to write off an account direct write off Method allowance year-end AJE revenue receivables % x total sales % x sales on account % x bal. of A/Rec. aging results consider bal. of allowance acct Uncollectible Accounts

Copyright © 1999 by M. Ray Gregg. All rights reserved. 59 Direct Write-Off Method D.Write off an account: Bad Debts Expense bal Accts Rec - Customerbal E.Reinstate if collected: Accts Rec - Customer col Bad Debts Expensecol record cash collection as usual

Copyright © 1999 by M. Ray Gregg. All rights reserved. 60 Practice Exercise The ledger of Kadler Company at the end of the current year shows Accounts Receivable $90,000, Sales $840,000, and Sales Returns and Allowances $40,000. a.If Allowance for Doubtful Accounts has a credit balance of $800 in the trial balance, journalize the adjusting entry at December 31, assuming bad debts are expected to be (1) 1% of net sales.

Copyright © 1999 by M. Ray Gregg. All rights reserved. 61 Practice Exercise The ledger of Kadler Company at the end of the current year shows Accounts Receivable $90,000, Sales $840,000, and Sales Returns and Allowances $40,000. a.If Allowance for Doubtful Accounts has a credit balance of $800 in the trial balance, journalize the adjusting entry at December 31, assuming bad debts are expected to be (1) 1% of net sales. Bad Debts Expense est Allow for Doubtful Acctsest How much?

Copyright © 1999 by M. Ray Gregg. All rights reserved. 62 Practice Exercise The ledger of Kadler Company at the end of the current year shows Accounts Receivable $90,000, Sales $840,000, and Sales Returns and Allowances $40,000. a.If Allowance for Doubtful Accounts has a credit balance of $800 in the trial balance, journalize the adjusting entry at December 31, assuming bad debts are expected to be (1) 1% of net sales. Bad Debts Expense est Allow for Doubtful Acctsest

Copyright © 1999 by M. Ray Gregg. All rights reserved. 63 Practice Exercise The ledger of Kadler Company at the end of the current year shows Accounts Receivable $90,000, Sales $840,000, and Sales Returns and Allowances $40,000. a.If Allowance for Doubtful Accounts has a credit balance of $800 in the trial balance, journalize the adjusting entry at December 31, assuming bad debts are expected to be (1) 1% of net sales. Bad Debts Expense est Allow for Doubtful Acctsest

Copyright © 1999 by M. Ray Gregg. All rights reserved. 64 Practice Exercise The ledger of Kadler Company at the end of the current year shows Accounts Receivable $90,000, Sales $840,000, and Sales Returns and Allowances $40,000. Good Choices: $8,800 ($8,000 + $800) $8,000 (1% x $800,000) $7,200 ($8,000 - $800)

Copyright © 1999 by M. Ray Gregg. All rights reserved. 65 Practice Exercise The ledger of Kadler Company at the end of the current year shows Accounts Receivable $90,000, Sales $840,000, and Sales Returns and Allowances $40,000. a.If Allowance for Doubtful Accounts has a credit balance of $800 in the trial balance, journalize the adjusting entry at December 31, assuming bad debts are expected to be (1) 1% of net sales. Bad Debts Expense 8,000 Allow for Doubtful Accts 8,000 Why ?

Copyright © 1999 by M. Ray Gregg. All rights reserved. 66 debit Bad Debts Expense to write off an account direct write off Method allowance year-end AJE revenue receivables % x total sales % x sales on account % x bal. of A/Rec. aging results consider bal. of allowance acct Uncollectible Accounts consider bal. of Allowance account

Copyright © 1999 by M. Ray Gregg. All rights reserved. 67 debit Bad Debts Expense to write off an account direct write off Method allowance year-end AJE revenue receivables % x total sales % x sales on account % x bal. of A/Rec. aging results consider bal. of allowance acct Uncollectible Accounts Income Statement View

Copyright © 1999 by M. Ray Gregg. All rights reserved. 68 Practice Exercise The ledger of Kadler Company at the end of the current year shows Accounts Receivable $90,000, Sales $840,000, and Sales Returns and Allowances $40,000. a.If Allowance for Doubtful Accounts has a credit balance of $800 in the trial balance, journalize the adjusting entry at December 31, assuming bad debts are expected to be (2) 10% of accounts receivable. Bad Debts Expense est Allow for Doubtful Acctsest

Copyright © 1999 by M. Ray Gregg. All rights reserved. 69 Practice Exercise The ledger of Kadler Company at the end of the current year shows Accounts Receivable $90,000, Sales $840,000, and Sales Returns and Allowances $40,000. a.If Allowance for Doubtful Accounts has a credit balance of $800 in the trial balance, journalize the adjusting entry at December 31, assuming bad debts are expected to be (2) 10% of accounts receivable. Bad Debts Expense est Allow for Doubtful Acctsest

Copyright © 1999 by M. Ray Gregg. All rights reserved. 70 Practice Exercise The ledger of Kadler Company at the end of the current year shows Accounts Receivable $90,000, Sales $840,000, and Sales Returns and Allowances $40,000. Good Choices: $9,800 ($9,000 + $800) $9,000 ($90,000 x 10%) $8,200 ($9,000 - $800) … and the winner is???

Copyright © 1999 by M. Ray Gregg. All rights reserved. 71 Practice Exercise The ledger of Kadler Company at the end of the current year shows Accounts Receivable $90,000, Sales $840,000, and Sales Returns and Allowances $40,000. a.If Allowance for Doubtful Accounts has a credit balance of $800 in the trial balance, journalize the adjusting entry at December 31, assuming bad debts are expected to be (2) 10% of accounts receivable. Bad Debts Expense 8,200 Allow for Doubtful Accts 8,200

Copyright © 1999 by M. Ray Gregg. All rights reserved. 72 debit Bad Debts Expense to write off an account direct write off Method allowance year-end AJE revenue receivables % x total sales % x sales on account % x bal. of A/Rec. aging results consider bal. of allowance acct Uncollectible Accounts consider bal. of Allowance account

Copyright © 1999 by M. Ray Gregg. All rights reserved. 73 debit Bad Debts Expense to write off an account direct write off Method allowance year-end AJE revenue receivables % x total sales % x sales on account % x bal. of A/Rec. aging results consider bal. of allowance acct Uncollectible Accounts Balance Sheet View

Copyright © 1999 by M. Ray Gregg. All rights reserved. 74 Practice Exercise The ledger of Kadler Company at the end of the current year shows Accounts Receivable $90,000, Sales $840,000, and Sales Returns and Allowances $40,000. b.If Allowance for Doubtful Accounts has a debit balance of $500 in the trial balance, journalize the adjusting entry at December 31, assuming bad debts are expected to be (1).75% of net sales.

Copyright © 1999 by M. Ray Gregg. All rights reserved. 75 Practice Exercise The ledger of Kadler Company at the end of the current year shows Accounts Receivable $90,000, Sales $840,000, and Sales Returns and Allowances $40,000. b.If Allowance for Doubtful Accounts has a debit balance of $500 in the trial balance, journalize the adjusting entry at December 31, assuming bad debts are expected to be (1).75% of net sales.

Copyright © 1999 by M. Ray Gregg. All rights reserved. 76 Practice Exercise The ledger of Kadler Company at the end of the current year shows Accounts Receivable $90,000, Sales $840,000, and Sales Returns and Allowances $40,000. b.If Allowance for Doubtful Accounts has a debit balance of $500 in the trial balance, journalize the adjusting entry at December 31, assuming bad debts are expected to be (1).75% of net sales.

Copyright © 1999 by M. Ray Gregg. All rights reserved. 77 Practice Exercise The ledger of Kadler Company at the end of the current year shows Accounts Receivable $90,000, Sales $840,000, and Sales Returns and Allowances $40,000. b.If Allowance for Doubtful Accounts has a debit balance of $500 in the trial balance, journalize the adjusting entry at December 31, assuming bad debts are expected to be (1).75% of net sales.

Copyright © 1999 by M. Ray Gregg. All rights reserved. 78 Practice Exercise The ledger of Kadler Company at the end of the current year shows Accounts Receivable $90,000, Sales $840,000, and Sales Returns and Allowances $40,000. Good Choices: $5,500 ($6,000 - $500) $6,000 (.75% x $800,000) $6,500 ($6,000 + $500) What do YOU think?

Copyright © 1999 by M. Ray Gregg. All rights reserved. 79 Practice Exercise The ledger of Kadler Company at the end of the current year shows Accounts Receivable $90,000, Sales $840,000, and Sales Returns and Allowances $40,000. b.If Allowance for Doubtful Accounts has a debit balance of $500 in the trial balance, journalize the adjusting entry at December 31, assuming bad debts are expected to be (1).75% of net sales. Bad Debts Expense 6,000 Allow for Doubtful Accts 6,000

Copyright © 1999 by M. Ray Gregg. All rights reserved. 80 Practice Exercise The ledger of Kadler Company at the end of the current year shows Accounts Receivable $90,000, Sales $840,000, and Sales Returns and Allowances $40,000. b.If Allowance for Doubtful Accounts has a debit balance of $500 in the trial balance, journalize the adjusting entry at December 31, assuming bad debts are expected to be (2) 8% of accounts receivable.

Copyright © 1999 by M. Ray Gregg. All rights reserved. 81 Practice Exercise The ledger of Kadler Company at the end of the current year shows Accounts Receivable $90,000, Sales $840,000, and Sales Returns and Allowances $40,000. b.If Allowance for Doubtful Accounts has a debit balance of $500 in the trial balance, journalize the adjusting entry at December 31, assuming bad debts are expected to be (2) 8% of accounts receivable.

Copyright © 1999 by M. Ray Gregg. All rights reserved. 82 Practice Exercise The ledger of Kadler Company at the end of the current year shows Accounts Receivable $90,000, Sales $840,000, and Sales Returns and Allowances $40,000. Good Choices: $6,700 ($7,200 - $500) $7,200 (8% x $90,000) $7,700 ($7,200 + $500) Are you ready?

Copyright © 1999 by M. Ray Gregg. All rights reserved. 83 Practice Exercise The ledger of Kadler Company at the end of the current year shows Accounts Receivable $90,000, Sales $840,000, and Sales Returns and Allowances $40,000. b.If Allowance for Doubtful Accounts has a debit balance of $500 in the trial balance, journalize the adjusting entry at December 31, assuming bad debts are expected to be (2) 8% of accounts receivable. Bad Debts Expense 7,700 Allow for Doubtful Accts 7,700 Yeah !!!

Copyright © 1999 by M. Ray Gregg. All rights reserved. 84 Receivables