BAD DEBTS Chapter 8 p. 407-411. Bad Debts = a term used to describe amounts that cannot be collected...
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Transcript of BAD DEBTS Chapter 8 p. 407-411. Bad Debts = a term used to describe amounts that cannot be collected...
BAD DEBTS
Chapter 8p. 407-411
• Bad Debts = a term used to describe amounts that cannot be collected
• The reporting of bad debts is governed by the matching principle
• Expenses from bad debts need to be reported in the same acctg period as the revenues they helped “produce”
The Allowance Method of Accounting for Bad Debts
1) Estimate the total bad debts expected from a period’s sales
2) An allowance is provided for the loss
Advantages
1) Matching principle – expense charged to period of revenue
2) Accounts Receivable are reported on balance sheet at estimated amount of cash to be collected
Example
Sales = $300,000Uncollected from customers = $20,000
Company estimates that $1500 of accounts receivable will be uncollectible
Recording the Estimated Bad Debts Expense
DR Bad Debts ExpenseCR Allowance for Doubtful Accounts
To record the estimated bad debts
This entry will cause the expense to appear on the income statement in the year the sales were made
The reasons why “Allowance for Doubtful Accounts” is credited…
• The account “Allowance for Doubtful Accounts” is a contra account.
A contra account MUST be used because you do not know which customers will not pay at the time of the adjusting entry.
Because it is not possible to identify which customers did not pay, the amounts cannot be removed from the Accounts Receivable Ledger
Bad Debts in the Accounts and in the Financial Statements
The Account called “Allowance for Doubtful Accounts” has the effect of reducing the Accounts Receivable account to something called “REALIZABLE VALUE”
SEE PAGE 409 for how this information is reported in the Balance Sheet
Writing off Bad Debt
DR Bad Debts ExpenseCR Allowance for Doubtful Accounts
This journal entry to write off bad debt does not affect total assets or net income
Bad Debt Recovery
Two journal entries:1) DR Accts Rec. – name of customer CR Allowance for Doubtful Accounts
To reinstate account of customer written off on <date>
• 2)DR CashCr Accounts Receivable – name of customer
Received full payment of <name of customer>
To Do
• Progress Check 8-7 to 8-9• QS 8-4 to 8-5• Exercise 8-5 to 8-7• Problem 8-2 to 8-3