Copyright © 1999 by M. Ray Gregg. All rights reserved.1
ReceivablesReceivables
Uncollectible Accounts
Copyright © 1999 by M. Ray Gregg. All rights reserved.3
ReceivablesReceivables
Premise:
When you extend credit to customers…
Copyright © 1999 by M. Ray Gregg. All rights reserved.4
ReceivablesReceivables
Premise:
When you extend credit to customers…
you know some customers won’t pay.
Copyright © 1999 by M. Ray Gregg. All rights reserved.5
ReceivablesReceivables
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
ReceivablesReceivables
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
ReceivablesReceivables
Copyright © 1999 by M. Ray Gregg. All rights reserved.8
ReceivablesReceivables
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
ReceivablesReceivables
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.12
Allowance
Method
Direct
Write-Off
Method
Compare
Compare
Copyright © 1999 by M. Ray Gregg. All rights reserved.13
Allowance MethodAdvance provision for estimate of accounts thought to be uncollectible
Copyright © 1999 by M. Ray Gregg. All rights reserved.17
1/1 12/31
R
3/31
Our CompanyOur AddressOur City, State Zip
Our CustomerCustomer’s AddressCity, State Zip
Copyright © 1999 by M. Ray Gregg. All rights reserved.18
1/1
R
4/30
Our CompanyOur AddressOur City, State Zip
Our CustomerCustomer’s AddressCity, State Zip
12/31
Copyright © 1999 by M. Ray Gregg. All rights reserved.19
1/1
R
5/31
Our CompanyOur AddressOur City, State Zip
Our CustomerCustomer’s AddressCity, State Zip
12/31
Copyright © 1999 by M. Ray Gregg. All rights reserved.20
1/1
R
5/31
Our CompanyOur AddressOur City, State Zip
Our CustomerCustomer’s AddressCity, State Zip
E
Is that matching?
12/31
Copyright © 1999 by M. Ray Gregg. All rights reserved.21
1/1
R
5/31
Our CompanyOur AddressOur City, State Zip
Our CustomerCustomer’s AddressCity, State Zip
E
12/31
Copyright © 1999 by M. Ray Gregg. All rights reserved.22
Allowance MethodAdvance provision for estimate of accounts thought to be uncollectible
A. Advantages
1. Provides better matching of expenses with time period
I.S.
Benefit
Copyright © 1999 by M. Ray Gregg. All rights reserved.23
Good CompanyBalance Sheet
December 31, xxxx
ASSETS
Current AssetsCash $10,000Accounts Receivable 30,000Merchandise Inventory 40,000Supplies 3,000Prepaid Insurance 7,000Total Current Assets $90,000
Copyright © 1999 by M. Ray Gregg. All rights reserved.24
Good CompanyBalance Sheet
December 31, xxxx
ASSETS
Current AssetsCash $10,000Accounts Receivable 30,000Merchandise Inventory 40,000Supplies 3,000Prepaid Insurance 7,000Total Current Assets $90,000
Copyright © 1999 by M. Ray Gregg. All rights reserved.25
ReceivablesReceivables
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 CompanyBalance Sheet
December 31, xxxx
ASSETS
Current AssetsCash $10,000Accounts Receivable $30,000Less: ??? ??? ? ? ?Merchandise Inventory 40,000Supplies 3,000Prepaid Insurance 7,000Total Current Assets $90,000
Copyright © 1999 by M. Ray Gregg. All rights reserved.27
Allowance MethodAdvance 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 ex-pected to be collected
Copyright © 1999 by M. Ray Gregg. All rights reserved.28
Allowance MethodAdvance 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 ex-pected to be collected
I.S.
Benefit
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 Accts estB.S. Benefit
I.S. Benefit
Copyright © 1999 by M. Ray Gregg. All rights reserved.31
Good CompanyBalance Sheet
December 31, xxxx
ASSETS
Current AssetsCash $10,000Accounts Receivable $30,000Less: Allow for D. A. 3,000 27,000Merchandise Inventory 40,000Supplies 3,000Prepaid Insurance 7,000Total Current Assets $87,000What kind of an account isAllowance 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 isAllowance for Doubtful Accounts?
Bad Debts Expense est Allow for Doubtful Accts est
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 Accts estAccounts
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 Accts est
Do not know which customers will not pay -- using subsidiary ledger.
Copyright © 1999 by M. Ray Gregg. All rights reserved.35
Good CompanyBalance Sheet
December 31, xxxx
ASSETS
Current AssetsCash $10,000Accounts Receivable $30,000Less: Allow for D. A. 3,000 27,000Merchandise Inventory 40,000Supplies 3,000Prepaid Insurance 7,000Total Current Assets $87,000
“CashRealizable
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 Accts est
Copyright © 1999 by M. Ray Gregg. All rights reserved.37
Allowance MethodC. Estimate may be based on:
1. Revenue
2. ReceivablesI.S. ViewB.S. View
Copyright © 1999 by M. Ray Gregg. All rights reserved.38
debit Bad Debts Expenseto write off an account
direct
write
off
Method
allowance
year-endAJE
reve
nue
receivables
% x total sales
% x saleson 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 Expenseto write off an account
direct
write
off
Method
allowance
year-endAJE
reve
nue
receivables
% x total sales
% x saleson 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 Expenseto write off an account
direct
write
off
Method
allowance
year-endAJE
reve
nue
receivables
% x total sales
% x saleson 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 Expenseto write off an account
direct
write
off
Method
allowance
year-endAJE
reve
nue
receivables
% x total sales
% x saleson 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 Expenseto write off an account
direct
write
off
Method
allowance
year-endAJE
reve
nue
receivables
% x total sales
% x saleson 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 Expenseto write off an account
direct
write
off
Method
allowance
year-endAJE
reve
nue
receivables
% x total sales
% x saleson 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 Expenseto write off an account
direct
write
off
Method
allowance
year-endAJE
reve
nue
receivables
% x total sales
% x saleson 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 Expenseto write off an account
direct
write
off
Method
allowance
year-endAJE
reve
nue
receivables
% x total sales
% x saleson 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 Expenseto write off an account
direct
write
off
Method
allowance
year-endAJE
reve
nue
receivables
% x total sales
% x saleson 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
Age Estimate
Less than 30 days 98%
30 – 60 days 85%
60 – 90 days 70%
90 – 120 days 50%
Over 120 days 25%
Copyright © 1999 by M. Ray Gregg. All rights reserved.48
debit Bad Debts Expenseto write off an account
direct
write
off
Method
allowance
year-endAJE
reve
nue
receivables
% x total sales
% x saleson account
% x bal.of A/Rec.
aging results
consider bal. of allowance acct
Uncollectible Accounts
consider bal. ofallowance account
Copyright © 1999 by M. Ray Gregg. All rights reserved.49
debit Bad Debts Expenseto write off an account
direct
write
off
Method
allowance
year-endAJE
reve
nue
receivables
% x total sales
% x saleson account
% x bal.of A/Rec.
aging results
consider bal. of allowance acct
Uncollectible Accounts
Income StatementView
Copyright © 1999 by M. Ray Gregg. All rights reserved.50
debit Bad Debts Expenseto write off an account
direct
write
off
Method
allowance
year-endAJE
reve
nue
receivables
% x total sales
% x saleson account
% x bal.of A/Rec.
aging results
consider bal. of allowance acct
Uncollectible Accounts
Balance SheetView
Copyright © 1999 by M. Ray Gregg. All rights reserved.51
debit Bad Debts Expenseto write off an account
direct
write
off
Method
allowance
year-endAJE
reve
nue
receivables
% x total sales
% x saleson 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 MethodC. 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 - Customer bal
Copyright © 1999 by M. Ray Gregg. All rights reserved.53
Allowance MethodC. 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 - Customer bal
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 MethodExpense recognized when account determined to be worthless
Copyright © 1999 by M. Ray Gregg. All rights reserved.55
1/1
R
5/31
Our CompanyOur AddressOur City, State Zip
Our CustomerCustomer’s AddressCity, State Zip
E
12/31
Copyright © 1999 by M. Ray Gregg. All rights reserved.56
Direct Write-Off MethodExpense 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 MethodD. Write off an account:
Bad Debts Expense bal
Accts Rec - Customer bal
Copyright © 1999 by M. Ray Gregg. All rights reserved.58
debit Bad Debts Expenseto write off an account
direct
write
off
Method
allowance
year-endAJE
reve
nue
receivables
% x total sales
% x saleson 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 MethodD. Write off an account:
Bad Debts Expense bal
Accts Rec - Customer bal
E. Reinstate if collected:
Accts Rec - Customer col
Bad Debts Expense col
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 balanceof $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 Accts est
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 Accts est
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 Accts est
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 Expenseto write off an account
direct
write
off
Method
allowance
year-endAJE
reve
nue
receivables
% x total sales
% x saleson account
% x bal.of A/Rec.
aging results
consider bal. of allowance acct
Uncollectible Accounts
consider bal. ofAllowance account
Copyright © 1999 by M. Ray Gregg. All rights reserved.67
debit Bad Debts Expenseto write off an account
direct
write
off
Method
allowance
year-endAJE
reve
nue
receivables
% x total sales
% x saleson account
% x bal.of A/Rec.
aging results
consider bal. of allowance acct
Uncollectible Accounts
Income StatementView
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 Accts est
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 Accts est
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 thewinner 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 Expenseto write off an account
direct
write
off
Method
allowance
year-endAJE
reve
nue
receivables
% x total sales
% x saleson account
% x bal.of A/Rec.
aging results
consider bal. of allowance acct
Uncollectible Accounts
consider bal. ofAllowance account
Copyright © 1999 by M. Ray Gregg. All rights reserved.73
debit Bad Debts Expenseto write off an account
direct
write
off
Method
allowance
year-endAJE
reve
nue
receivables
% x total sales
% x saleson account
% x bal.of A/Rec.
aging results
consider bal. of allowance acct
Uncollectible Accounts
Balance SheetView
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 doYOU 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 youready?
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!!!