Accounts Receivable & Bad Debts Expense

allowance method

an accounting method that anticipates that some of the accounts receivable will not be collected; results in a contra asset account Allowance for Doubtful Accounts; under the allowance method, bad debts expense is reported earlier than under the direct write-off method.

bad debts expense

an operating expense that results when accounts receivable cannot be collected.

allowance for doubtful accounts

a contra asset account (an asset account with a credit balance) that reports the estimated amount of the accounts receivable that might not be collected; this account balance in combination with the balance in accounts receivable provides the estimated net realizable value of the accounts receivable.

aging of accounts receivable

a report which sorts the accounts receivable according to the date of the sales invoice; often used as the percentage of accounts receivable technique for determining the correct balance in Allowance for Doubtful Accounts.

percentage of sales

a technique under the allowance method where Bad Debts Expense is debited for a percentage of the credit sales and the Allowance for Doubtful Accounts is credited for the same amount in order to achieve the matching principle.

percentage of accounts receivable

a technique under the allowance method where the balance in the account Allowance for Doubtful Accounts is adjusted to an estimated percentage of the asset accounts receivable. The adjustment amount is debited to Bad Debts Expense.

accounts receivable

claims resulting from the delivery of goods or services on credit.

recovery of bad account

collecting an account receivable that was previously written off; under the allowance method two entries are required: (1) debit Accounts Receivable and credit Allowance for Doubtful Accounts for the amount that is recovered, and (2) debit Cash and credit Accounts Receivable for the amount recovered.

direct write-off

method no allowance account; when an account is determined to be worthless, Accounts Receivable is credited, and Bad Debts Expense is debited.