ACCT 2200 Ch.8 Bad Debt expense PDF

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Summary

Chapter 8 covers bad debt expenses, interest revenue, and the pro and cons of extending credit. Shows how to estimate bad debt. Bad debt estimates example....

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e n c ha compan t tive wi co pe itors w o also xt c . 2. The disadvantages include increased wage costs, bad debt costs, and delayed receipt of cash. additional employees to evaluate potential customers, track the amounts due, and follow up on receivables. customers will not pay their bill so the company will have bad debt costs and even if the company collects in full, they will wait 30-60 days to receive the cash. Typically the additional revenue gained from selling on account exceeds the additional costs. Accounts receivable are short-term receivables that differ from notes receivable. A note receivable is a promise to pay according to a written agreement. Typically accounts receivable do not require a written agreement. Notes receivable typically charge interest and have a stronger l First, we will visit accounts

1. Accounts receivable are the amounts owed to a business by its 2. The two objectives in accounting for accounts receivable and bad debts relate to the need to report accounts receivable on the

related credit sales are made. 3. The expense recognition "matching" principle requires that the income statement include all expenses, including bad debts in the accounting period in which the related credit sales are made. Thi principle is violated if you record sales in one period when they

occur and bad debts in a different period. T will not pay. 4. reduces accounts receivable (as well as net income) for an estimate of uncollectible accounts (bad debts). two step process. 1) The company makes an end of period adjustment to record the estimated bad debt expense in the period 2) The company removes or to be uncollectible.

period. Analyze: The Allowance for Doubtful Accounts, a contra-asset account, is increased by $900, and Bad Debt Expense, a reduction in Stockholders’ Equity, is increased by the same amount. Record: The journal entry to record the event at the end of the period is to debit the expense account, Bad Debt Expense for $900, and credit the contra-asset account, Allowance for Doubtful Accounts, for the same amount. The allowance for doubtful accounts is a contra-asset account that offsets accounts receivable.

The allowance for doubtful account is increase by credit and decreased by debit. An allowance for doubtful account is a contra-asset account that nets against the total receivables presented on the balance sheet to reflect only the amounts expected to be paid. The allowance for doubtful accounts is only an estimate of the amount of accounts receivable which I expected to not be collectible.

Like all contra-

next You can see that the credit balance in the Allowance for Doubtful Accounts prior to the adjusting entry was $14,100. 5,00

We use the allowance method because no one knows which particular customers’ accounts receivable are uncollectible. In the current period we estimated bad debt of $900. This is the amount that will appear on the income statement at

Now, let's assume VFC writes off an $800 receivable from Fast Fashions because the company could not pay its account.

Remember, the Allowance for

asset account, Allowance for Doubtful Accounts for $800 and credit the asset account Accounts Receivable for the same amount. T Allowance for Doubtful Accounts decreases that account’s balance.

An analysis of this event shows that the Allowance for Doubtful Accounts will be decreased by $800, and the asset account, Accounts Receivable, Remember, the Allowance for Doubtful Accounts is a contra-asset account that reduces Accounts Receivable. sure you do not record the expense again! Remember, the expense is recorded at the end of the period and is an estimate so that the bad debt expense is associated with the proper sales. allowance for bad debts or doubtful accounts.

1. Percentage of credit sales method - this method is also called the income statement approach. This method is simpler to apply. Estimates bad debts by multiplying the estimated percentage of bad debt losses by the current period’s credit sales. 2. - this method is also called This method is harder to apply, but generally more accurate. This method follows three steps. 1) Prepare a list of aged accounts receivable with totals for each aging category. 2) Estimate bad debt loss percentages for each category of age. Generally, the longer an amount remains unpaid, 3) Compute the total estimate by multiplying the total in step 1 by the percentages in step 2. The amount in step 3 is the desired TOTAL balance in the allowance account, not the amount of the adjustment. amount of the adjustment, subtract the existing balance from the

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Income statement approach: several additional steps. So the percentage of credit sales that we just looked that focuses on the bad debit expense that will be shown on the income statement for

With the aging of the accounts receivable the company will look at the age of each amount in the account receivable at the end of the period. As account receivable become older it is less likely they will be collected so you will see the percentage increase the older the accounts get

The first thing that the company will do is they will age their accounts receivable so you see here the have several different customers and different amounts of receivable and they have broken those out by age.

based only on the current periods

Beginning balance is relevant when using the aging of accounts receivable in completing your percentage

To write off that account: We are going to debit our allowance for doubtful accounts to reduce the remaining allowance that’s available and credit our accounts receivable to take that receivable off of the balance sheet. Remember that we do not record any additional expense. * The expense has already been recorded. Balance Sheet Presentation(after). After we write that off. Remember here we have removed that $1,000 receivable. Prior to the write off the account receivable balance was a $50,000 and after the write off the account receivable balance is $49,000. When we debit the allowance for doubtful accounts we are reducing that allowance balance, so before we reduced it was $5,000 and now it is $4,000. I have that shown in the t account. So we started with the beginning balance of $800. We then estimated $4,200 for the year, now we have written off $1,000 we have reduced that allowance and the ending balance is $4,000. So down here you see the account receivable net both before and after the adjustment for that company that went bankrupt are the same. They don’t change and that’s because when the company initially records that bad debt expense they are matching those expenses to the related revenues for the period. So they record the expense and match it to the revenues that relate to that expense during the current period and then later they’ll adjust the allowance and account receivable. So they will not later expensing something that doesn’t match the related revenues.

1. - so it will differ from the actual amount. Rather than going back and revising the initial estimates, the company simply revises bad debt estimates for the current period. period are reduced through lower estimates in the current period and vice versa for underestimates. 2. written off account, it is called a recovery. When this occurs, the

account. P 3. directly writes off bad debts when they occur and does not use an Although this method is not allowed under GAAP, it is

1. A company reports Notes Receivable if it uses a promissory note to document its right to collect money from another party, and Companies typically report notes receivable in : another business. which the customer requires an extended payment period. 3 company converts an existing accounts receivable to a notes 2. receivable except notes receivable charge interest. Interest rates are always stated as an annual percentage (even if the note is for less

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Principal is the amount of the note receivable or the Rate is the interest rate stated as an annual percentage even if the loan is for less than one year. Time is the portion of the year for which interest is

number of months out of 12. 3. Under accrual basis accounting, interest revenue is earned over but not received by debiting Interest Receivable and crediting Interest 4. At maturity, the company must record the interest income and the principal received. Because allowance for doubtful accounts is a contra asset account therefore an increase in its balance will decrease assets on the balance sheet.

A note receivable occurs when a company loans money to somebody else either to an employee or another company and when that happens a formal promissory note is signed so there’s a formal document. So if a company has notes receivable then they will earn interest from that loan that they had made to somebody else. When they loan money to another person/company they earn interest from the amount they loaned.

So here we look at 4 key events that occur with any note receivable, so the first date that happens is the note is created. The second date that happens is the end of the accounting period. So here this company’s accounting period ends on December 31st so they are going to record an adjustment journal entry at the end of the year (this doesn’t mean anything is paid on December 31 but under accrual accounting the company has to record whenever assets and liabilities they have at the end of the period). At the end of the period they will have interest receivable so they have to record that at the end of the year. The 3rd important date is when interest is received. The 4th important even is when that principal payment is repaid (when the company receives the full principal amount back).

1. Receivables Turnover ratio measures how many times, on average, the process of selling and collecting is repeated during the turnover or that the company is collecting quickly. o

Net Receivables. 2. Days to collect measures the average number of days from the time of sale on account to collection. Higher days to collect means o

3. Factoring receivables is an arrangement where receivables are the receivables pays a fee but is able to speed up collection by getting the cash now 4. companies charge a fee as much as 3% but the company receives...