Accounting for Uncollectible Receivables Direct Write-off Method not GAAPnot GAAP used for Tax Purposesused for Tax Purposes Allowance Method is GAAPis GAAP matches the expense to the revenue generatedmatches the expense to the revenue generated values receivables at their net realizable valuevalues receivables at their net realizable value

Expenses are matched to the revenue generated in that accounting period Expenses are matched to the revenue generated in that accounting period “let the expenses follow the revenues” Matching Principle Never overstate assets or income. Conservatism Constraint

Allowance for Doubtful Accounts Debit Actual amounts written off during the period during the periodCredit Beginning balance Amnts. Recorded as uncollectible accounts expense accounts expense Amnts. Recovered from write-offs = Ending balance Accounts Receivable Debit Beginning balance Credit Sales Reinstated A/R previously Written-off previously Written-off Ending Balance Credit Amounts rec’d from Customers Accounts Written Off

Allowance Methods of Valuing Receivables Percentage-of-Sales Method - Income Statement Approach focusing on matching the “expense” to the revenue generatedPercentage-of-Sales Method - Income Statement Approach focusing on matching the “expense” to the revenue generated Percentage-of-Receivables Method - Balance Sheet Approach focusing on the balance in the “allowance” calculation to determine the net realizable value following conservatismPercentage-of-Receivables Method - Balance Sheet Approach focusing on the balance in the “allowance” calculation to determine the net realizable value following conservatism

Accounting for Uncollectible Accounts Allowance Method (GAAP) Dr. Bad Debt Expense $$$ Cr. Allowance for Doubtful Accts $$$ Adjusting journal entry Dr. Allowance for Doubtful Accts $$$ Cr. A/R - Dead Beat$$$ Write off a specific account as uncollectible Dr. A/R - Dead Beat$$$ Cr Allowance for Doubtful Accts$$$ Reinstate account if payment is received Dr. Cash$$$ Cr. A/R - Deadbeat$$$ Apply payment to reinstated account

Accounting for Uncollectible Accounts Direct Write-Off Method (Not GAAP -- used for Tax Purposes) Dr. Bad Debt Expense$$$ Cr. A/R - Dead Beat $$$ Write off a specific account as uncollectible Dr. A/R - Dead Beat$$$ Cr Bad Debts Expense $$$ Reinstate account if payment is received Dr. Cash$$$ Cr. A/R - Deadbeat$$$ Apply payment to reinstated account