Chapter 7

interest revenue

current year interest earned

bad debt expense (notecard classifications)

1. type of account: expense 2. reported on: income statement 3. increases with: debit 4. temporary

calculation of Net Realizable Value

accounts receivable - allowance for doubtful accounts

examples of control accounts

accounts receivable, plant & equipment, accounts payable

interest receivable

previous year interest earned

representational faithfulness

report receivables at amount expected to be collected

allowance method

1. uncollectible amounts are material 2. accounts receivable is reported at Net Realizable Value (net realizable value = accounts receivable - allowance for doubtful accounts) 3. record bad debt expense in the period of the sale as an adjustment at the end of the period based on an estimate * under the allowance method, the income statement (bad debt expense) and net realizable value of A/R (allowance for doubtful accounts) are affected when the end of the period adjustment is made 4. specific uncollectible accounts are written off against the allowance account. *under the allowance method, there is no effect on the income statement and no effect on the balance sheet when an account is written off.

control account

general ledger account that is supported by a subsidiary ledger; collective subsidiary ledger that is made into one account

Bad Debt Expense (+E, -OE) Allowance for Doubtful Accounts (+XA, -A)

journal entry allowance method bad debt expense for end of period adjustment Income Statement: expense is increased, net income is decreased Balance Sheet: net realizable value of A/R is decreased, stockholders equity is decreased

two methods to account for bad debts

1. direct write off method 2. allowance method

allowance for doubtful accounts (notecard classification)

1. type of account: contra asset 2. reported on: balance sheet 3. increases with: credit 4. permanent

direct write-off method

1. uncollectible amounts are not material 2.accounts receivable is collected at full amount 3. record bad debt expense when specific uncollectible accounts are written off. *under the direct write-off method, the income statement (bad debt expense) is affected when an account is written off. *violates the matching principle

using the allowance method, bad debt expense is recorded when?

at the end of the period based on an allowance for doubtful accounts

using the direct write off method, bad debt expense is recorded when?

at the point an account is written off as uncollectible, however, this violates the matching principle.

bad debt expense

based on an estimate is recorded as an adjustment at the end of the accounting period to match it in the same period that the related revenues are reported.

conservatism

be careful not to overstate assets or income

Allowance for Doubtful Accounts (-XA, +A) A/R (-A)

journal entry allowance method bad debt expense for write off an uncollectible account Income Statement: expense is not affected, net income is not affected Balance Sheet: net realizable value of A/R is not affected, stockholders equity is not affected

matching principle

match bad debt expense in the same period that related sales are reported

the percentage of net credit sales approach

the approach that emphasizes matching bad debt expense with the sales of the period also, this method takes the current balance of the allowance account into consideration

percentage of accounts receivable

the approach that emphasizes the net realizable value of accounts receivable

subsidiary ledger

the detail for a number of individual items that collectively make up a single ledger account

using the allowance method, there are two approaches to estimating the amount of bad debt. what are they?

the percentage of net credit sales approach & percentage of accounts receivable

write-off of specifically identified uncollectible account

whenever a specific account is identified as uncollectible, it is removed from A/R and written off (charged off) against the allowance account