Financial Accounting II-CTRL 202

Spring 2019-Lecture “6” 1

Accounting For Receivables

Chapter 9

Wild, Shaw, and Chiappetta

Fundamental Accounting Principles
23rd Edition

Copyright © 2017 McGraw-Hill Education. All rights reserved.

No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Learning Objectives
1. Apply the direct write-off
method for uncollectibles

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 Valuing Accounts Receivable

Some customers may not pay their account.

Uncollectible amounts are referred to as bad debts.
 Bad Debts
The term bad debts usually refers to accounts receivable (or trade accounts
receivable) that will not be collected.

Bad debts can also refer to notes receivable that will not be collected.
Bad debt is debt that is not collectible and therefore worthless to the creditor.

Bad debt is usually a product of the debtor going into bankruptcy

OR …………..but may also occur when the creditor's cost of pursuing the debt
collection activities is more than the amount of the debt.

Once a debt is considered bad, the business may be able to write it off as an
expense on its income tax return

The bad debts associated with accounts receivable is reported on

the income statement as Bad Debts Expense or Uncollectible
Accounts Expense

Source: Accounting Coach and Investopedia

 Recording Bad Debts
Direct Writing off
“Record it when you are
sure of it”
•The direct write-off method of accounting
for bad debts records the loss from an
uncollectible account receivable when it
is determined to be uncollectible
•No Attempt is made to predict bad
Debts.
Allowance Writing off
“Consider it might happen”
•The allowance method of accounting
for bad debts matches the estimated
loss from uncollectible accounts
receivable against the sales they
helped produce.
•We must use estimated losses
Learning Objective 3

Apply the direct write-off

method for uncollectibles

© 2016 Pearson Education,

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Inc.
How Are Uncollectibles Accounted for
When Using the Direct Write-Off
Method?
• Bad debts expense arises from failure to
collect from some customers who purchase on
account.
• There are two methods of accounting for
uncollectible receivables:
– Direct write-off method
– Allowance method (required by GAAP)

© 2016 Pearson Education,

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Inc.
 Recording and Writing Off
Uncollectible Accounts—Direct
Write-off Method
• The direct write-off method of accounting for
uncollectible receivables is primarily used by
small, nonpublic companies.
– Accounts receivable are written off when the
business determines that it will never collect from
a specific customer.
– Bad debts expense is recorded.

© 2016 Pearson Education,

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Inc.
 Recording and Writing Off
Uncollectible Accounts—Direct
Write-off Method
• On August 9, Smart Touch Learning
determines that it will not be able to collect
$200 from customer Dan King for a sale of
merchandise inventory made on May 5.

© 2016 Pearson Education,

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Inc.
 Recording Payment after writing off the
bad debts—Direct Write-off Method
• Sometimes customers make payments after
the company writes off the account.
– To account for this recovery, the company must
reverse the earlier write-off.
– Then it records the receipt of the payment.

© 2016 Pearson Education,

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Inc.
 Exercise “1”

Feb. 14 Bad Debt Expense $400

Accounts Receivable $400
Accounts Receivable $400
April 1st Bad Debt Expense $400

April 1st Cash $400

Accounts Receivable
$400

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 Exercise (2) Writing off of and Recovery of Accounts Receivable: Allowance Method
A. Percentage of Receivables

(a) Estimate the balance of the Allowance for Doubtful Accounts assuming the
company uses 2% of total accounts receivable to estimate uncollectible. Total
Accounts Receivable is $2,600.

Allowance for Doubtful Accounts = % of bad debts x Accounts Receivable

Allowance for uncollectible Amount= 2% x 2,600 = $52

Exercise (2) Writing off of and Recovery of Accounts Receivable: Allowance Method
A. Percentage of Receivables
(b) Prepare the adjusting entry to record bad debts expense using the estimate from
previous requirement. Assume the unadjusted balance in the Allowance for Doubtful
Accounts is a $4 credit.
Allowance for uncollectible Amount = 2% x 2,600 = $52

Allowance for DD
$4
unadjusted Balance
$48
Adjustment
Minus
$52
Current Year
Balance

Date Description Dr. Cr.

31st Dec. 48
Bad Debt Expense

Allowance for Doubtful Debts 48

Allowance for DD of the CURRENT period = Allowance for DD Till Today - Beginning Credit
Balance
(c) On the following month, the company decides that $80 account receivable of one
of the customers who passed away is uncollectible and so the company writes it off
as a bad debt, what is the journal entry in this case?
(D) On March 1st, the inheritors of the customer mentioned in part (c) paid the amount
due, what will be the reversing and collection entries?

Description Dr. Cr.

Allowance for Doubtful Debts 80

Accounts Receivable
80
. Accounts Receivable 80
Allowance for Doubtful Debts 80
80
Cash
Accounts Receivable 80
Exercise (2) Writing off of and Recovery of Accounts Receivable: Allowance Method
B. Percentage of Sales
(a) Estimate the balance of the uncollectible assuming the company uses 0.5% of
annual credit sales (annual credit sales were $10,000).
Allowance for DD for the CURRENT period = % of bad debts x Credit Sales (Current Period)

= (0.5% x $10,000) = $50

(b) Prepare the adjusting entry to record bad debts expense using the
estimate from part (a)

Date Description Dr. Cr.

31st Dec. Bad Debt Expense $50

Allowance for Doubtful Debts $50

C. Percentage of Aging Receivables

(a) Estimate the balance of the Allowance for Doubtful Accounts using the aging
of accounts receivable method.

Allowance for DD = A.R. of period 0 × % of bad debts period

+ A.R. of period 1 x% of bad debts of period 1
+ A.R. of period 2 x % of bad debts of period 2…………………and so on

= (2,000 X 1%) + (300 x 2%) + (80 x 5%) + (100 x 7%) + (120 x 10% ) = $49
C. Percentage of Aging Receivables

(b) Prepare the adjusting entry to record bad debts expense using the estimate
from part a. Assume the unadjusted balance in the Allowance for Doubtful
Accounts is a $10 debit.
Allowance for DD

$10 $59
Unadjusted Adjustment
Balance Plus

$49
Current Year Balance
Date Description Dr. Cr.
31st Dec. Bad Debt Expense $59

Allowance for Doubtful Debts $59

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End of Chapter 9

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