Create an account
1. A claim against the customer created by selling merchandise or services on credit
2. Someone buys from you on credit IOU, due in 30 or 60 days
3. Current Assest
1. A customer's written promise to pay an amount and possibly interest at an agreed-uopn rate
2. More formal written out IOU period more than 60 days
3. Current Assest
Bad Debt Expense
1. Operating expense incurred failure to collect receivables
2. Uncollectible Account Expense
3. Doubtful account Expense
Direct Write Off Method
Recognizes the expense only when an account is judged to be WORTHLESS or uncollectible
Small Companies (Direct Write Off Method)
DEBIT Bad Debt Exp
CREDIT Account Receivable (A.R)
but if they do come back and pay then.....
CREDIT Bad Dept Exp
1. Estimating uncollectible accounts at the end of the accounting period
2. Provides an expense for uncollectible receivables in advance of their write-off
3. % of sales
4. analysis of receivables
Big Companies (Allowance Method)
DEBIT Bad Debt Exp
CREDIT Allowance for Doubtful Accounts (ADA)
then reduce value receivables to amount cash expected which is called the Net Realizable Value on the balance sheet (AR - ADA<contra asset> = NRV<think what I am going to get>)
Allowance Method journalize
1. Reduce value of receivables to amount of cash expected
2. Allocation to current period expected expense reduction
3. DEBITS Uncollectible Accounts Exp, CREDIT Allowance for Doubtful Accounts.
4. When is uncollectible, its written off against the allowance account
Using the percent of sales.....
Adjusting entry is made without regard to the balance of the allowance account
Using the analysis of receivables
Adjusting entry is recorded so that the balance of the allowance account will equal the estimated uncollectibles at the end of the period
Allowance account will have a credit balance after the adjusting entry been posted (Allowance Method)
Is a Contra Asset Account
Direct Write-Off journalize
1. DEBITS Bad Debt Expense CREDIT Accounts Receivable
2. Neither allowance account nor adjusting entry is needed at the end of the period
Notes Receivable journalize
1. when A.R is recorded DEBIT Notes Receivable, CREDIT Accounts Receivable
2. when note mature(all goes good); DEBIT cash, CREDIT Notes Receivable and Interest Revenue
When note is said to be dishonered (all goes bad)
1. Maturity Value DEBIT Acounts Receivable
2. Face Value CREDIT Notes Receivable and Interest Revenue for the difference
Account Receivable Turnover
Net Sales / Avg Accounts receivable
Measure how frequently A.R are being converted into cash
# of Days' Sales
End-of-Year A.R / Avg daily sales
Measures length of time the A.R have been outstanding
Aging the receivables
Analyze A.R according to various age grouping, with due date being the base point for determing age
Net Realizable Value =
1. A.R - ADA = NRV
2. Estimated selling price of an item - Any direct costs of disposal = Net Realizable Value
All money claims against other entites, including people, business firms, and other organizations
Regardless of the care used in granting credit
and the collection procedures used?
A part of the credit sales will not be collectible.
2 methods used to estimate uncollectible accounts receivable at the end of the period
1. Percent of sales
2. Analysis of the receivables
Percent of Sales Method
1.If credit sales for the period are $3,000,000 and it is estimated that ¾% will be uncollectible, Bad Debt Expense is debited for $22,500 ($3,000,000 × .0075). This approach disregards the balance of $3,250 in the allowance account before the adjustment.
2. After the following adjusting entry on December 31 is posted, Allowance for Doubtful Accounts will have a balance of $25,750 ($3,250 + $22,500).
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