Chapter 7 - Accounts receivable and bad debts expense. This chapter presents the following content: Receivables on balance sheet, bad debts expense, recording bad debts adjustment, balance sheet presentation, writing off uncollectible accounts, balance sheet, recovery of bad debts,. | Accounts Receivable and Bad Debts Expense Receivables on Balance Sheet Trade receivables Arise from sale of goods or services to customers Nontrade receivables Arise from other sources Bad Debts Expense An account receivable that proves uncollectible Accrual accounting requires that we recognize the bad debts expense in the same period as the sales revenue Since we may not know at end of period which accounts will be uncollectible, we must estimate the amount Use allowance method Recording Bad Debts Adjustment Estimate and record amount in an end-of-period adjustment Estimate uncollectible amount Record increase in expense and decrease in accounts receivable Since specific uncollectible account not known, use contra account Allowance for Doubtful Accounts Balance Sheet Presentation Current assets Cash $1,000 Accounts receivable $8,000 Deduct: Allow for DA 500 7,500 Notes receivable 900 Writing Off Uncollectible Accounts After determining a specific account is uncollectible Decrease . | Accounts Receivable and Bad Debts Expense Receivables on Balance Sheet Trade receivables Arise from sale of goods or services to customers Nontrade receivables Arise from other sources Bad Debts Expense An account receivable that proves uncollectible Accrual accounting requires that we recognize the bad debts expense in the same period as the sales revenue Since we may not know at end of period which accounts will be uncollectible, we must estimate the amount Use allowance method Recording Bad Debts Adjustment Estimate and record amount in an end-of-period adjustment Estimate uncollectible amount Record increase in expense and decrease in accounts receivable Since specific uncollectible account not known, use contra account Allowance for Doubtful Accounts Balance Sheet Presentation Current assets Cash $1,000 Accounts receivable $8,000 Deduct: Allow for DA 500 7,500 Notes receivable 900 Writing Off Uncollectible Accounts After determining a specific account is uncollectible Decrease accounts receivable Decrease allowance for doubtful accounts Balance Sheet Before Write-off After Accts Rec $8,000 $(200) $7,800 Allowance 500 (200) 300 Net realizable value $7,500 $7,500 Recovery of Bad Debts Reinstate the account Increase accounts receivable Increase allowance for doubtful accounts Collect the account Increase cash Decrease accounts receivable Estimating Bad Debts: Based on Sales Use a historical average of annual uncollectibles to annual net sales Calculate amount of bad debts expense Multiply net sales by percent Adjust Bad Debts Expense by the amount calculated Estimating Bad Debts: Based on Accounts Receivable Use a historical average of annual uncollectibles to year end accounts receivable Calculate balance of allowance for doubtful accounts Multiply year end accounts receivable by percent Adjust Allowance for Doubtful Accounts to the amount calculated Aging of Accounts Receivable Schedule that lists each invoice by days elapsed since due date Aging categories .
