ACCT 2101 Chapter 8:Receivables

direct write off

which type off write off method is used for taxes?

direct write off

This is the journal entry for (allowance method or direct write off)? Dr. Bad Debt Expense Cr. A/R

analysis of receivables

- "How much of the year-end balance of A/R will not be collected?" - The difference between the amount determined to be uncollectible and the actual balance of - ----- Allowance for Uncollectible Accounts is the expense for the period. - The aging (how old is the account) of A/R is the process of listing each customer's account according to the due date of the account. - The older the account, the less likely that it will be paid.

allowance method

- Bad debt losses are matched against the sales they help produce. - At the time of sale, management cannot identify which customers will not pay. - To observe the matching rule (revenues and the related expenses must be reported in the same period), losses from uncollectible accounts must be estimated. - The estimate becomes an expense in the fiscal year in which the sales are made, thus the revenue and expense will be reported in the same period. - Bad Debt Expense appears on the income statement as an operating expense. - Allowance for Doubtful Accounts appears on the balance sheet as a contra-asset account that is deducted from Accounts Receivable. - Reduces the accounts receivable to the amount expected to be realized in cash. - Accounts Receivable minus Allowance for - Doubtful Accounts equals Net Accounts Receivable - Accounts receivable may be shown as net A/R on a balance sheet, with the amount of the Allowance for Doubtful Accounts shown in a note to the financial statements.

direct write off method

- Recognize a loss (by debiting bad debt expense) at the time it is determined that an account is uncollectible. - All companies must use the Direct Write-Off method for tax purposes. - Often used by small companies and companies with few receivables for book purposes as well as tax purposes. Examples: restaurant, convenience store and a small retail store. - Per GAAP, companies with a large amount of receivables must use the allowance method for book purposes (not the direct-write off method).

a/r

- Short-term financial assets (current asset on the balance sheet) - The result from extending credit to an individual or a business also called trade credit - Credit department sets credit policies

Allowance for Doubtful Accounts (Allowance for Bad Debts)

Contra-Asset account, credit balance

bad debt expense

Expense account, thus on the income statement, debit balance

accounts receivable turnover

Indicates how many times receivables are collected during a year, on average. = Net Sales/Average Net Accounts Receivable

average days sales uncollected

It is an estimate of the length of time the accounts receivable have been outstanding. = Days in a year / a/r Turnover

bad debt

Journal Entry to write off a _____ ______ using the Allowance Method (Either the Percentage of Net Sales Method or Analysis of Receivables Method). Dr. Allowance for Doubtful Accounts Cr. Accounts Receivable

Financing Receivables

Money tied up in receivables is something that many companies seek to avoid. Companies may use one or more of these methods so that they can receive cash faster: set up a separate finance company, borrow money and pledge A/R, factor A/R.

uncollectible accounts

Not all accounts are collectible, there will always be customers who don't pay.

percentage of net sales

The amount is based on the company's historic losses.

allowance method

This is the journal entry for (allowance method or direct write off)? Dr. Bad Debt Expense Cr. Allowance for Doubtful Accounts

allowance for doubtful accounts

_____ _____ ______ ______= Allowance for Uncollectible Accounts = Allowance for Bad Debts

bad debt expense

_____ _____ ______= Uncollectible Accounts Expense

no

does direct write off method use allowance for doubtful accounts?

yes

does the allowance method use allowance for doubtful accounts?