Accounting For Bad Debts

1. Accounting ForBad Debts Chapter 14

2. Describing how the Bad Debts Expense account and the Allowance for Doubtful Accounts account are used to record bad debts. Learning Objective 1

3. Learning Unit 14-1 Bad debts are a danger when credit sales are offered to customers.

4. Learning Unit 14-1 • Some credit sales end up as 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.

5. Learning Unit 14-1 • An estimate is made as to how many of the current accounting period’s sales will be uncollectible. • A debit to Bad Debts Expense and a credit to a contra-asset account called Allowance for Bad Debts is the journal entry for this method.

6. Learning Unit 14-1 • 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.

7. Learning Unit 14-1 Accounts Affected Category Rules Bad Debt Expense Expense Dr. Allowance for Contra- Cr. Doubtful Accounts Asset

8. Using the income statement approach and the balance sheet approach to estimate the amount of Bad Debts Expense. Learning Objective 2

9. Learning Unit 14-2 Percentage of Sales Adjusting entries are based on a % of net sales. The percentage used is based on past history.

10. Learning Unit 14-2 Any existing balance in the Allowance account is ignored. Dec 31, 200x Bad Debt Expense XXX Allowance for Doubtful Accounts XXX Record estimate of bad debts

11. Learning Unit 14-2 Aging of Accounts Receivable Adjusting entries are based on bringing the Allowance account to a required amount.

12. Preparing an Aging of Accounts Receivable. Learning Objective 3

13. LengthAmount% 1-30 $100,000 1 $ 1,000 31-60 80,000 3 2,400 61-90 60,000 7 4,200 90 + 40,000 9 3,600 Total $280,000 $11,200 Aging of Receivables Example Allowance for Uncollectible Accounts Accounts Receivable

14. Learning Unit 14-2 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.

15. Learning Unit 14-2 Dec 31, 200x Bad Debt Expense 11,200 Allowance for Doubtful Accounts 11,200 Record estimate of bad debts Assume that the Allowance account has a credit balance of 1,000.

16. Learning Unit 14-2 What is the adjusting entry? Bad Debt Expense 10,200 Allowance for Doubtful Accounts 10,200 To record allowance for uncollectibles

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

18. Learning Unit 14-3 • How do we write off an account using the Allowance account? Allowance for Doubtful Accounts XXX Accounts Receivable, John Doe XXX To write off John Doe’s account

19. Learning Unit 14-3 • How do we record a recovered debt? Accounts Receivable, John Doe XXX Allowance for Doubtful Accounts XXX To reinstate John Doe’s account Cash XXX Accounts Receivable, John Doe XXX To record payment

20. Using the direct write-off method. Learning Objective 5

21. Learning Unit 14-3 • How do we write off an account using the direct write-off method? Bad Debt Expenses XXX Accounts Receivable, John Doe XXX To write off John Doe’s account

22. Learning Unit 14-3 • How do we record a recovered debt using the direct method? Accounts Receivable, John Doe XXX Bad Debts Recovered XXX Cash XXX Accounts Receivable, John Doe XXX

23. Learning Unit 14-3 • How do we record a recovered debt the same year it was written off? Accounts Receivable, John Doe XXX Bad Debts Expense XXX To reinstate John Doe’s account Cash XXX Accounts Receivable, John Doe XXX Received payment

24. End of Chapter 14