14- 1 accounting for bad debts chapter 14. 14- 2 learning objective 1 describing how the bad debts...
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14- 1
Accounting For
Bad Debts
Chapter 14
14- 2
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