1. Estimation for doubtful debt Adjustment into SOCI dan SFP
Week 8
RECEIVABLES ACCOUNTING SYSTEM
Learning Objectives
Writing-off bad debt
Estimation for doubtful debt
Adjustment into SOCI dan SFP P3

2. Goods can be sold either on cash basis or credit basis
The practice of selling on credit, rather than by cash, is being commonly used to increase the volume of sales of business, since the purchaser may not have enough cash to make purchase.
If cash basis
Dr Bank/Cash
Cr Sales
If credit basis
Dr Accounts Receivables/Debtor

3. Pros and Cons of Extending Credit
Advantage
Increases the seller’s revenues.
Disadvantages
Bad debt costs.
Delayed receipt of cash.
The advantage of extending credit is that it helps customers buy products and services, thereby increasing the seller’s revenues. The disadvantages of extending credit are the following additional costs introduced:
Increased wage costs. If credit is extended, the company will have to hire people to (a) evaluate whether each customer is creditworthy, (b) track how much each customer owes, and (c) follow up to collect the receivable from each customer.
Bad debt costs. Inevitably, some customers dispute what they owe ,or they run into financial difficulties and pay only a fraction of their account balances. These bad debt costs are considered an additional cost of extending credit.
Delayed receipt of cash. Even if the company were to collect in full from customers, it will likely have to wait 30–60 days before receiving the cash.
Similar advantages and disadvantages are considered when deciding whether to create notes receivable. A note receivable is created when a formal written contract is established outlining the terms by which a company will receive amounts it is owed. Notes receivable are viewed as a stronger legal claim than accounts receivable, but a formal document (note) needs to be created for every transaction.
8-3

4. Bad debts EXPENSES Possible scenarios concerning a bad debt eg:
Financial difficulties
Overseeing the debt
Dishonesty

5. Bad debts EXPENSES
When account receivables or customers not being able pay the amount they owes to the business  uncollectible = bad debt
Accounting treatment for bad debt:
Direct write-off method

6. Write-off method Simpler method
At the date that Account receivables proven to be bad/uncollectible - Amount cannot be collected is removed from accounting records
In SOCI  bad debt = expenses = decrease profit
In SFP  remove bad debt to reduce asset (AR)
SHOULD ONLY HAVE ONE BAD DEBTS ACCOUNT
Example:
Date
Particulars Dr Cr
June 30
Bad debt expenses (SOCI)
500
Accounts receivable (SFP)
To record the write off of an uncollectible account from Jones

7. DOUBTFUL DEBT EXPENSE
Through logic, common sense and experience, there is a possibility that some of existing Accounts receivables will not be collectible
Thus, an estimation has to be made
= Doubtful debts
Charging potential bad debt for the year as expenses

8. Reasons
Business will not overstate its profit figure
Business will not understate its losses figure
To present better picture of the state of affairs of the business
Showing the figure for accounts receivable which is as close as possible to its true value at the balance sheet date
CONSERVATISM

9. Difference between bad debts and doubtful debts
Proven to be bad or uncollectible
Not certain which accounts receivables are likely to be uncollectible Not certain what amounts are likely to be uncollectible

10. How to make ESTIMATION
Several methods to determine amount for allowance of doubtful debt:
Specific identification method
Percentage of accounts receivables method
Ageing (aging) of accounts method
Percentage based on net credit sales method

11. Method 1 : Specific Identification Method
By going through the individual accounts receivable, the business may be able to estimate the amount of doubtful debts by simply adding up the accounts that the business judge as most likely to go bad

12. Eg : Business has the following accounts receivable at the end of accounting period : After reviewing the accounts, the business thinks that Lee Mei Ling and Jason Mulu may not be able to settle because they have been owing for a long time and have not made any effort to settle them So, the amount of doubtful debts totaling RM780 (RM280+RM500)
Accounts receivables
Amount in RM
Azahari Zain
300
Lee Mei Ling
280
David Matthew
320
Hamidah Salleh
800
Jason Mulu
500
David Quah
700

13. Method 2 : Percentage of accounts receivable method
Estimated by multiplying the year end total accounts receivable figure by a certain percentage
The percentage figure applied is percentage that deemed to be appropriate or reasonable based on past experience or what is customary in the type of business involved to represent the amount that likely to be uncollectible
Eg : Business has the accounts receivable at the end of accounting period of RM150,000 and the estimated percentage is 2%
so it will be likely RM150,000 X 2% = RM3,000

14. Method 3 : Ageing (Aging) of Accounts Method
The business classifies individual accounts receivable into age groups based on length of time of their debt have been outstanding
Eg :
Age group
Amount (RM)
Estimated Percent Uncollectible (%)
Estimated Amount Uncollectible (RM)
Not yet due
80,000
400
1-30 days past due
70,000 1
700
31-60 days past due
40,000 2
800
61-90 days past due
30,000 5
1,500
days past due
20,000 10
2,000
> 120 days past due
10,000 30
3,000
250,000
8,400

15. Method 4 : Percentage based on net credit sales method
The percentage figure applied is percentage of total net credit sales of a year to represent the amount that likely to be uncollectible based on past experience
Eg : Bisnezz Trading has RM1,000,000 net credit sales for The business deemed that 1/2% will be uncollectible, then the estimated doubtful debts expense will be RM1,000,000 X ½% = RM5,000

16. provision for doubtful debt
Accounting entries are:
Implication: 1. Expenses should be increased by amount that maybe uncollectible - Profit will be decreased
2. Account Receivable will be reduced, otherwise, Accounts Receivable will be overstated
Purpose of creating allowance for doubtful debts : Is to show more correct amount of accounts receivables that will better reflect the financial position of business
Alternative names for allowance for doubtful debt (page 215)
Date
Particulars Dr Cr
June 30
Doubtful debt expenses (SOCI)
25,500
Provision for doubtful debt (SFP)
To provide for an allowance for uncollectible account from sales

17. SOCI SFP Revenue XX Less Cost of Goods Sold Gross Profit
Add Other Revenues
Less Expenses
(Bad debts)
(Doubtful debts expense)
Net Profit
Current Assets XX
Accounts Receivable
Less Provision for doubtful debt
Net Accounts Receivable

18. Adjustment to provision for doubtful debt
Accounts Receivables is likely to be different figure each year, thus, allowance for doubtful debt is also likely to change from year to year
Eg : Hayati Enterprise wants to establish a provision for doubtful debts based on a percentage of accounts receivable. On 31 December 2013, the business has accounts receivable figure of RM100,000 and it estimates that 1% of accounts receivable will be bad/uncollectible
31/12/2013
Dr. Doubtful Debts (SOCI) RM1,000
Cr. Provision for Doubtful Debts (SFP) RM1,000

19. Adjustment to provision for doubtful debt
2014
Assume that RM700 of Accounts Receivable were proven to be bad on 3 January 2014
Dr. Provision for Doubtful Debts RM700
Cr. Accounts Receivable RM700
The provision for doubtful debts had a credit balance RM300.

20. Adjustment to provision for doubtful debt
31/12/2014
Assume that Accounts Receivable on 31 December was RM120,000 and it wanted to create provision for doubtful debts based on 1% of the outstanding Accounts Receivable
Thus, new provision for doubtful debts amount is RM1,200

21. The provision for doubtful debts had a credit balance RM300.
The new provision for doubtful debts is RM1,200
Note that the amount of RM1,200 is the required balance for provision for doubtful debts, Not the amount of doubtful debts expense
Dr. Doubtful Debts (SOCI) RM900
Cr. Provision for Doubtful Debts (SFP) RM900

22. Adjustment to provision for doubtful debt
2015
Assume that RM100 of Accounts Receivable were proven to be bad on 8 January 2015
Dr. Provision for Doubtful Debts RM100
Cr. Accounts Receivable RM100
The balance provision for doubtful debts is RM1,100

23. Adjustment to provision for doubtful debt
31/12/2015
Assume that Accounts Receivable on 31 December was RM95,000 and it wanted to create provision for doubtful debts based on 1% of the outstanding Accounts Receivable
Thus, provision for doubtful debts is RM950

24. The provision for doubtful debts had a credit balance RM1,100
The new provision for doubtful debts is RM950
Note that the new amount for provision is decreasing
It means the provision has an excess of RM150 = RM1,100 – RM950
Dr. Provision for Doubtful Debts (SFP) RM150
Cr. Doubtful Debts (SOCI) RM150
Thus, it is treating doubtful debts expense as revenue

25. Adjustment to provision for doubtful debt
2016
Assume that RM1,150 of Accounts Receivable were proven to be bad on 15 February 2016
Note that the provision for doubtful debts had a balance of RM950, it means the balance of provision for doubtful debts is not enough to cover this bad debts. It is short by RM200.
15/2/2016
Dr. Provision for Doubtful Debts RM950
Dr. Bad Debts RM200
Cr. Accounts Receivable RM1,150

26. Adjustment to provision for doubtful debt
31/12/2006
Assume that Accounts Receivable on 31 December was RM110,000 and it wanted to create provision for doubtful debts based on 1% of the outstanding Accounts Receivable
Thus, provision for doubtful debts is RM1,100
Dr. Doubtful Debts (SOCI) RM1,100
Cr. Provision for Doubtful Debts (SFP) RM1,100

27. Bad debts recovered
If already written off as bad debts, then suddenly able to recover the debt
1. Directly record the bad debt recovered at the time of receipt of cash/bank
Dr. Cash/bank (SFP)
Cr. Bad debts recovered (SOCI) OR
2. Reinstate the Accounts Receivable first then record the receipt of payment of the bad debts
Dr. Accounts Receivable (SFP)
Dr. Cash/Bank (SFP)
Cr. Accounts Receivable (SFP)
Reinstate the debt making the following entries:
Dr Accounts Receivable’s account
Cr Bad debts recovered account (Revenue)
When the payment is received in settlement of the debt:

28. Discounts allowED
Discount allowed are cash discounts given to customers by a business for early payment
Eg : In a situation where customers are given terms of, say, 1/10, net 30, it means that if the customer pays his debt within 10 days from the date of purchase, he gets 1% discount off the invoiced price involved
If he does not pay within 10 days from the date of purchase, the last day to pay the invoice price is 30 days from the date the credit sale was made
If a customer purchases goods on credit from a business on 1 January 2013 and the business offer credit terms of 1/10, the debtor will be able to get a 1% discount if he pays by the 10th of January 2013
If he does not want to take the discount, the last day to pay the invoice price will be the 31st January 2013

29. Discounts allowable
On the basis of the conservatism concept, a firm tries to recognize all possible losses and does not realise profits unless they are actually earned.
On the basis of matching concept, the firm may want to make an estimate of the amount of discount allowed to customers who may potentially pay within the discount period.
In such case, the estimate of discount allowable will be treated as an expense.
Dr. Discount Allowable xxx
Cr. Provision for Discount Allowable xxx
Eg : Malaysian Memories wants to make provision for discount allowable for 2% of Accounts Receivable on 31st December and provision for doubtful debts is 1% of RM100,000 of Accounts Receivable
Dr. Discount Allowable RM 1,980
Cr. Provision for Discount Allowable RM1,980

30. End of Week 8