Accounting For Bad Debts Chapter 13 2004 Prentice

Learning Objective 1 Describing how the Bad Debts Expense account and the Allowance for Doubtful Accounts account are used to record bad debts. © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9 e by Slater 13 - 2

Learning Unit 13 -1 (Accrual Accounting and Bad Debts) Companies that offer credit sales will be unable to collect from some customers. Some credit sales end up as bad debts. © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9 e by Slater 13 - 3

Learning Unit 13 -1 (Accrual Accounting and Bad Debts) These bad debts should be recognized in the accounting period in which the sales were made. Usually, bad debts do not end up as uncollectible until a year or so later. © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9 e by Slater 13 - 4

Learning Unit 13 -1 (Accrual Accounting and Bad Debts) An estimate is made as to how many of the current sales will be uncollectible. The Allowance for Bad Debts (Allowance for Doubtful Accounts) is a contra-account to Accounts Receivable. © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9 e by Slater 13 - 5

Learning Unit 13 -1 (Accrual Accounting and Bad Debts) The allowance amount is subtracted from Accounts Receivable. This leaves a net realizable value for the receivables. The Allowance for Bad Debts account is debited and Accounts Receivable credited when an account is written off as a bad debt. © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9 e by Slater 13 - 6

Learning Unit 13 -1 (Accrual Accounting and Bad Debts) Accounts Affected Bad Debt Expense Allowance for Doubtful Accounts Category Expense Contraasset Rules Dr. 4, 000 Cr. 4, 000 December 31 Bad Debt Expense 1, 600 Allowance for Doubtful Accounts To record estimate of bad debts 1, 600 © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9 e by Slater 13 - 7

Learning Unit 13 -1 (Accrual Accounting and Bad Debts) Abby Ellen Company Partial Balance Sheet December 31, 20 x 1 Current Assets: Cash Accounts receivable $100, 000 Less: Allowance for doubtful accounts 1, 600 Merchandise inventory Total current assets $ 51, 400 98, 400 200, 000 $349, 800 © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9 e by Slater 13 - 8

Learning Unit 13 -1 (Accrual Accounting and Bad Debts) Allowance for Doubtful Accounts Receivable, J. Moore Writing off J. Moore account 200 © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9 e by Slater 200 13 - 9

Learning Objective 2 Using the income statement approach and the balance sheet approach to estimate the amount of Bad Debts Expense. © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9 e by Slater 13 - 10

Learning Unit 13 -2 (Income Statement Approach) Adjusting entries to record the Bad Debts Expense are based on a percentage of net credit sales. The percentage used is based on past history. © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9 e by Slater 13 - 11

Learning Unit 13 -2 (Income Statement Approach) The credit department estimates that uncollectible-account expense is 1% of net credit sales, which were $80, 000 for 20 x 4. December 31 Bad Debts Expense 800 Allowance for Doubtful Accounts 800 To record estimate of bad debts (. 01 × $80, 000) © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9 e by Slater 13 - 12

Learning Unit 13 -2 (Income Statement Approach) Any existing balance in the Allowance account is ignored. Accounts Receivable Bal. 7, 000 Allowance for Doubtful Accounts 100 800 Adj. 900 Bal. © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9 e by Slater 13 - 13

Learning Unit 13 -2 (Balance Sheet Approach) Adjusting entries are based on bringing the Allowance account to a required amount. This method is a balance-sheet approach because it focuses on accounts receivable. © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9 e by Slater 13 - 14

Learning Objective 3 Preparing an Aging of Accounts Receivable. © 2004 Prentice Hall Business

Learning Unit 13 -2 (Balance Sheet Approach) Not Yet Due Days Past Due 1 -30 days 31 -60 days 61 -90 days Over 90 Accounts Receivable $3, 600 Estimated % Bad Debt Expense 3 2, 000 4 870 10 20 330 50 $7, 000 Less current balance Adjusting entry Allowance for Doubtful Accounts $108 80 87 40 165 $480 – 100 $380 © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9 e by Slater 13 - 16

Learning Unit 13 -2 (Balance Sheet Approach) The adjusting entry must include the amount that will leave an allowance balance equal to the accounts receivable that are not expected to be collected. © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9 e by Slater 13 - 17

Learning Unit 13 -2 (Balance Sheet Approach) Bad Debts Expense Allowance for Doubtful Accounts ($480 – $100) Recorded expense for the year Accounts Receivable Bal. 7, 000 380 Allowance for Doubtful Accounts 100 380 Adj. 480 Bal. © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9 e by Slater 13 - 18

Learning Objective 4 Writing off an account using the Allowance for Doubtful Accounts account.

Learning Unit 13 -3 (Writing Off and Recovering) Suppose that in 20 x 7, the Abby Ellen Company determines that the account of Jill Sullivan for $900 is uncollectible. The account must be written off. © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9 e by Slater 13 - 20

Learning Unit 13 -3 (Writing Off and Recovering) Allowance for Doubtful Accounts Receivable, Jill Sullivan Wrote off Sullivan account 900 © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9 e by Slater 900 13 - 21

Learning Unit 13 -3 (Writing Off and Recovering) How is a recovered debt recorded? Accounts Receivable, John Doe Allowance for Doubtful Accounts To reinstate John Doe’s account XXX Cash Accounts Receivable, John Doe To record payment XXX XXX © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9 e by Slater 13 - 22

Learning Objective 5 Using the direct write-off method. © 2004 Prentice Hall Business Publishing,

Learning Unit 13 -3 (Writing Off and Recovering) How do we write off an account using the direct write-off method? Bad Debt Expenses XXX Accounts Receivable, John Doe To write off John Doe’s account XXX © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9 e by Slater 13 - 24

Learning Unit 13 -3 (Writing Off and Recovering) How do we record a recovered debt using the direct method? Accounts Receivable, John Doe Bad Debts Recovered XXX Cash XXX Accounts Receivable, John Doe XXX © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9 e by Slater 13 - 25

Learning Unit 13 -3 (Writing Off and Recovering) How do we record a recovered debt the same year it was written off? Accounts Receivable, John Doe Bad Debts Expense To reinstate John Doe’s account XXX Cash XXX Accounts Receivable, John Doe Received payment XXX © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9 e by Slater 13 - 26