14- 1

Accounting For

Bad Debts

Chapter 14

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Learning Objective 1

Describing how the Bad Debts

Expense account and theAllowance for Doubtful

Accounts account are usedto record bad debts.

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Bad debts are a dangerwhen credit sales areoffered to customers.

Learning Unit 14-1

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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.

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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.

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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.

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Accounts Affected Category RulesAccounts Affected Category Rules

Bad Debt Expense Expense Dr. Allowance for Contra- Cr. Doubtful Accounts Asset

Bad Debt Expense Expense Dr. Allowance for Contra- Cr. Doubtful Accounts Asset

Learning Unit 14-1

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Learning Objective 2

Using the income statementapproach and the balancesheet approach to estimatethe amount of Bad Debts

Expense.

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Learning Unit 14-2

Percentage of Sales

Adjusting entries are based on a % of net sales.Adjusting entries are based on a % of net sales.

The percentage used is based on past history.The percentage used is based on past history.

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Dec 31, 200xBad Debt Expense XXX

Allowance for Doubtful Accounts XXXRecord estimate of bad debts

Dec 31, 200xBad Debt Expense XXX

Allowance for Doubtful Accounts XXXRecord estimate of bad debts

Any existing balance in the Allowanceaccount is ignored.

Any existing balance in the Allowanceaccount is ignored.

Learning Unit 14-2

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Aging of Accounts Receivable

Adjusting entries are based on bringingthe Allowance account to a required amount.

Adjusting entries are based on bringingthe Allowance account to a required amount.

Learning Unit 14-2

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Learning Objective 3

Preparing an Agingof Accounts Receivable.

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Allowance forUncollectible

AccountsLength Amount %1-30 $100,000 1 $ 1,00031-60 80,000 3 2,40061-90 60,000 7 4,20090 + 40,000 9 3,600Total $280,000

$11,200

AccountsReceivable

Aging of Receivables Example

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The adjusting entry must include theamount that will leave an allowance

balance equal to the accountsreceivable that are not expected

to be collected.

The adjusting entry must include theamount that will leave an allowance

balance equal to the accountsreceivable that are not expected

to be collected.

Learning Unit 14-2

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Assume that the Allowance accounthas a credit balance of 1,000.

Dec 31, 200xBad Debt Expense 11,200

Allowance for Doubtful Accounts 11,200Record estimate of bad debts

Dec 31, 200xBad Debt Expense 11,200

Allowance for Doubtful Accounts 11,200Record estimate of bad debts

Learning Unit 14-2

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Learning Unit 14-2

Bad Debt Expense 10,200Allowance forDoubtful Accounts 10,200

To record allowance for uncollectibles

What is the adjusting entry?What is the adjusting entry?

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Learning Objective 4

Writing off an accountusing the Allowance for

Doubtful Accounts account.

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Allowance for Doubtful Accounts XXXAccounts Receivable, John Doe XXX

To write off John Doe’s account

Learning Unit 14-3

How do we write off an account using the Allowance account?

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Accounts Receivable, John Doe XXXAllowance for Doubtful Accounts XXX

To reinstate John Doe’s account

Accounts Receivable, John Doe XXXAllowance for Doubtful Accounts XXX

To reinstate John Doe’s account

Cash XXXAccounts Receivable, John Doe XXX

To record payment

Cash XXXAccounts Receivable, John Doe XXX

To record payment

Learning Unit 14-3

How do we record a recovered debt?

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Learning Objective 5

Using the direct write-off method.

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Bad Debt Expenses XXXAccounts Receivable, John Doe XXX

To write off John Doe’s account

Bad Debt Expenses XXXAccounts Receivable, John Doe XXX

To write off John Doe’s account

Learning Unit 14-3

How do we write off an account using the direct write-off method?

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Accounts Receivable, John Doe XXXBad Debts Recovered XXX

Accounts Receivable, John Doe XXXBad Debts Recovered XXX

Cash XXXAccounts Receivable, John Doe XXX

Cash XXXAccounts Receivable, John Doe XXX

Learning Unit 14-3

How do we record a recovered debt using the direct method?

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Accounts Receivable, John Doe XXXBad Debts Expense XXX

To reinstate John Doe’s account

Accounts Receivable, John Doe XXXBad Debts Expense XXX

To reinstate John Doe’s account

Cash XXXAccounts Receivable, John Doe XXX

Received payment

Cash XXXAccounts Receivable, John Doe XXX

Received payment

Learning Unit 14-3

How do we record a recovered debt the same year it was written off?

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End of Chapter 14