Receivables

Lecture 11
 Study Objectives

Types of Receivables

Recognition & Valuation of Accounts Receivable

Accounting for bad debts

Accounts Receivable
 Receivables
Receivables
Ø Amounts due from individuals and other
companies
Ø Claims expected to be collected in cash

major classes of receivables are:

1. Accounts Receivable (trade receivables)

2. Notes Receivable
3. Other Receivables, e.g. interest receivable
 Accounts Receivables

The 3 primary accounting problems associated

with accounts receivable are:
1. Recognizing
2. Valuing
3. Disposing
 Recognizing Accounts Receivables
Date Description Debit($) Credit($)
July 1 A/R 1000
Sales 1000
sales on account
July 5 Sales returns & allowances 100
A/R 100
merchandise returned
July 11 Cash ($900 – 18) 882
Sales Discounts ($900 x 2%) 18
A/R 900
collection of A/R
 Valuing Accounts Receivables

If companies make credit sales to customers,

some may turn out to be uncollectible (bad).
Cash (Net) realizable value
Ø The net amount that the company expects to receive
in cash.
Ø Excludes amounts that the company estimates as
uncollectible.
Seller records losses that result from credit
sales as bad debt expense.
 Accounting for Uncollectible Accounts

Methods of Accounting for Uncollectible Accounts

1. Allowance Method 2. Direct Write-Off Method

Ø Losses are estimated before Ø Only write off when actual
actual write off loss happens
Ø Better matching Ø No matching
Ø Receivable stated at cash Ø Receivable not stated at cash
realizable value realizable value
Ø Required by IFRS. Ø Theoretically undesirable
Ø Percentage-of-receivables Ø NOT acceptable for financial
basis reporting
 1. Allowance Method
Estimate and record ‘uncollectible’ accounts at the end of each
period.
For ‘matching’ purpose, bad debt expense should be recorded
in the same accounting period in which the sales related to the
uncollectible account were recorded.
The adjusting entry to record the estimated uncollectibles at
the end of the period:
Date Account Titles and Explanation Debit Credit
20X1 Bad debt expense 12,000
Dec 31 Allowance for doubtful accounts 12,000
To record estimated uncollectible
account
PAST DUE
Methods to Estimate Bad Debts
%-of-sales %-of-receivables

Emphasis on Emphasis on
Matching Realizable Value

Sales Accts.
Bad Rec. All. for
Debts Uncoll.
Exp. Accts.

Income Statement of
Statement Financial
Focus Position Focus
 Estimating Bad Debts
%-of-sales (Income Statement Approach)
Ø Emphasize on past average percentage relationship
between actual bad debt losses and net credit sales
Ø Emphasizes the matching principle by estimating the
bad debt expense associated with the current period’s
credit sales.

Bad debts expense is computed as follows:

Current Period Sales
x Bad Debt %
= Estimated Bad Debts Expense
 % of Sales
The ABC company had credit sales of $100,000. The
current accounts receivable balance is $30,500. The
allowance for doubtful accounts balance is $350.
Historically, 2 percent of the credit sales are not collected.

Bad Debt Expense 2,000

Allowance for Doubtful Accounts 2,000
To record estimated uncollectible accounts for the year.

Allowance for Doubtful Accounts

Balance 350
Adjusting 2,000
Dec. 31, Bal. 2,350
 1. Allowance Method: Percentage-of-receivable
•Percentage-of-receivable
Ø Emphasis on Realizable Value
Ø Matching Accounts Receivable with Allowance for Doubtful accounts
The ABC company had credit sales of $100,000. The current
accounts receivable balance is $30,500. The allowance for
doubtful accounts balance is $350. Historically, 2 percent of the
accounts receivable are not collected.
Bad Debt Expense 260
Allowance for Doubtful Accounts 260
To record estimated uncollectible accounts for the year.
Allowance for Doubtful Accounts
Balance 350
Adjusting 260
Dec. 31, Bal. 610
 1. Allowance Method: Percentage-of-receivable
%-of-receivables (Statement of Financial Position Approach)
Ø Use the historical relationship between accounts receivable
and bad debt losses
Ø The multiple rates (known as aging of receivables), are
applied to the net accounts receivable to determine the
desired balance in the Allowance for Doubtful Accounts.
Ø Bad Debt Expense: the adjustment necessary to bring the
Allowance account to its desired ending balance.

1) Compute the estimate of the Allowance for Doubtful

(Uncollectible) Accounts: Year-end Accounts Receivable x Bad debt %
2) Bad Debts Expense:
Estimate d Adjuste d Balance in Allowance for
Doubtful Accounts
Unadjuste d Ye ar-End Balance in Allowance for
- Doubtful Accounts
= Estimate d Bad De bts Expe nse
 1. Allowance Method: Percentage-of-receivable
(Aging of receivables)
Dec.31, 20X1, the receivables for East Co. were as follows:

Not Days Past Due

Past over
Customer Balance Due 1-30 31-60 61-90 91-180 181-365 365
Ashby & Co. $ 150 $ 150
B. T. Barr 610 $ 350 $260
Brock Co. 470 $ 470

Saxon Woods 160 160

Total $86,300 $75,000 $4,000 $3,100 $1,900 $1,200 $800 $300

Uncollectibles % 2% 5% 10% 20% 30% 50% 80%

 1. Allowance Method: Percentage-of-receivable
(Aging of receivables)
Not Days Past Due
Past over
Customer Balance Due 1-30 31-60 61-90 91-180 181-365 365
Ashby & Co. $ 150 $ 150
B. T. Barr 610 $ 350 $260
Brock Co. 470 $ 470

Saxon Woods 160 160

Total $86,300 $75,000 $4,000 $3,100 $1,900 $1,200 $800 $300

Uncollectibles
PERCENT 2% 5% 10% 20% 30% 50% 80%

AMOUNT $3,390 =$1,500 $200 $310 $380 $360 $400 $240

 1. Allowance Method: Percentage-of-receivable
General Ledger
Unadjusted credit balance in
Accounts Receivable “allowance account”: $510
86,300
Desired balance: $3,390
Allowance for Doubtful Acct.
510 Statement of Fin. Position
2,880
? Accounts receivable $86,300
3,390 Less: Allowance for
Bad Debt Expense doubtful accounts 3,390
2,880 Net realizable value $82,910

Date Account Titles and Explanation Debit Credit

20X1 Bad debt expense ($3,390 - 510) 2,880
Dec 31 Allowance for doubtful accounts 2,880
 1. Allowance Method: Actual Write off of Bad Debts
The General Manager of East Co. authorized a write-off of
the $160 balance owed by Saxon Woods on Jan 20, 20X2:
Date Account Titles and Explanation Debit Credit
20X2 Allowance for doubtful accounts 160
Jan 20 Accounts Receivable - Saxon Woods 160
To write off an uncollectible account

Note: Bad Debt Expense is not debited

The actual write-off entry for $160 does not reduce net
receivables:
Before After
Accts. Receivable $86,300 $86,140
Less: Allowance for Doubtful Accounts 3,390 3,230
Net Receivables $82,910 $82,910
1. Allowance Method: Later Collection on Written-off Bad Debts

On Feb. 26, 20X2, Saxon Woods paid the $120 amount that
East Co. had written off on Jan. 20:
Note: Before the payment entry, the debt must be restored.
ΠDate Account Titles and Explanation Debit Credit
20X2 Accounts Receivable - Saxon Woods 120
Feb 26 Allowance for doubtful accounts 120
To reverse the entry made to write off
the accounts

 Date Account Titles and Explanation Debit Credit

20X2 Cash 120
Feb 26 Accounts Receivable - Saxon Woods 120
To record collection of the account.
 2. Direct Write-off Method
Bad debt losses NOT anticipated & NO allowance account
used
No entries until an account is determined to be uncollectible
Actual loss à Bad Debts Expense
No attempt to exercise matching or to show cash realizable
value
UNLESS bad debt losses are insignificant, this method is
NOT acceptable for financial reporting

Date Account Titles and Explanation Debit Credit

20X2 Bad Debt Expense 160
Feb 20 Accounts Receivable - Saxon Woods 160
To write off an uncollectiable account
(no adjusting entry required in 20X1)
Lecture 11
Receivables
Example Period 1 Period 2

Activity

Revenue $80,000 Revenue $ 0

Direct
Write off Bad Debt Exp. 0 Bad Debt Exp. 5,000
Net Income $80,000 Net Loss ($ 5,000)

Revenue $80,000 Revenue $ 0

Allowance
Method Bad Debt Exp. 5,000 Bad Debt Exp. 0
Net Income $75,000 Net Income $ 0