Accounts Receivable

Direct Write-Off Method

- Waits until a specific account is uncollectible to record the expense - Inferior to Allowance method - Receivables reported at full amount - assets are overstated on the balance sheet - Poor matching of uncollectible expense against revenue - The direct write-off may not match the bad debt expense of each period against the revenue of the period in which the sale was made

Net Realizable Value

AR - AFDA

Trade Receivables

Accounts receivable and notes receivable from SALES TRANSACTIONS

Writing off AR (Journal Entry)

Dr. AFDA Cr. AR

Recovery of an Uncollectible Account

Dr. AR Cr. AFDA Dr. Cash Cr. AR

Direct Write-Off (Journal Entry)

Dr. Bad Debt Expense Cr. AR

Writing off AR (Allowance Method)

- When AR is proven to be uncollectible, the company must write-off those specific accounts - An account is written off for ACCOUNTING PURPOSES only - No effect on NET INCOME or NET receivables.

3 Categories

1. Accounts receivable 2. Notes receivable 3. Other receivables

Methods for Accounting for Uncollectible Receivables

Adjusting entry. - Companies will recognize estimated bad debts expense at end of accounting period. 1. Allowance method (Percent-of-sales & Aging method) 2. Direct write-off method

Receivables Definition

Amounts due to a business from its customers or other entities expected to be collected in cash

Accounts Receivables (Definition)

Amounts owed by customers due to the sale of goods and services (payment usually due within 30 days)

Aging of AR Method

Analyzes specific individual AR according to the length of time they have been outstanding - Applies historical rates of "uncollectibility" appropriate to age - Estimates desired ending balance of the Allowance for Uncollectible Accounts as a percentage of the current ending balance of Accounts Receivable (based on historical rates of A/R that is uncollected) BALANCE SHEET approach Based on a B/S number : Accounts Receivable Calculates a B/S number : Allowance for Uncollectible Accounts

Percent of Sales Method

Bad debt expense = next credit sales x estimated % uncollectible INCOME STATEMENT approach - Based on an I/S number : Sales - Calculates an I/S number : Bad Debt Expense (AKA Uncollectible Expense)

Accounts Receivables

Balance in general ledger - Control account: summarizes total amount due from all customers Subsidiary ledger - Separate account for each customer CURRENT ASSETS

Allowance for Doubtful Accounts

Contra-account to Accounts Receivable; CREDIT balance; Shows amount of receivables expected not to be collected; Balance Sheet account

Percent of Sales (Journal Entry)

Dr. Bad Debt Expense Cr. Allowance for Doubtful Accounts (AFDA)

Aging of AR Method (Journal Entry)

Dr. Bad Debts Expense Cr. Allowance for Doubtful Accounts

Notes Receivable (Journal entry)

Dr. Notes Receivable Cr. Sales Dr. Interest Receivable Cr. Interest Revenue

Notes Receivables (Definition)

Formal credit instrument; More formal than AR; Written promise to pay a sum at the maturity date +interest AKA Promissory Notes

Other Receivables (Definition)

Interest receivable, loans and advances to employees, recoverable sales tax, income tax receivable etc.

Non-Bank Credit Card Receivables

Recorded as Accounts Receivable Nonbanks are companies that offer financial products, loans and services but aren't chartered as banks

Allowance Method

Records collection losses based on company's collection experience - Estimate Bad Debt Expense - Allowance for Doubtful Accounts (AFDA)

Bad Debt Expense

Shows amount of receivables expected not to be collected; Income Statement account; DEBIT balance