accounting for acc receivable
TRANSCRIPT
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ACCOUNTINGFOR
ACCOUNTS RECEIVABLE
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LEARNING OUTCOMES
At the end of the session, students are able to:
Differentiate between bad debts and doubtfuldebts;
Differentiate between discount allowed anddiscount allowable;
Make adjustment on account receivables for
bad debts expense and bad debts recoveredif any; and
Calculate and record allowance for doubtful
debts and allowance for discount allowable.
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INTRODUCTION
Most of business sales are on credit basis.
Customers are allowed to make payment at
later date.Credit term exposes business to RISKS that
some of the customers may never pay for the
goods sold or services rendered to them.
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PAYMENT STRUCTURE AND
TREATMENT IN THE FIN. STMNTS
INCOME
STATEMENT
BALANCE
SHEET
a Very prompt payment Discount allowed
b Future discount allowed Discount allowable Allowance for
discount allowable
c Just in time payment No discount given
d Reluctant to pay Doubtful debt Allowance fordoubtful debt
e Unable to pay (bankrupt
or dead)
Bad debt
f Settlement of debt after
debt had beenconsidered as bad
Bad debt recovered
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BAD DEBT EXPENSE
Certain and proven that debtor could not
settle the debt.
Effect on income statement:Uncollected amount will be treated as bad debt
expense as to reduce profit of business.
Effect on balance sheet:
The uncollected amount will be deducted from
the account receivables as to reduce current
asset of business.
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WORKED EXAMPLE
Additional information as at 31/12/2010:
Debts of RM500 are to be written off as bad.
Trial Balance as at 31/12/2010 (extract)
DR CR
Account Receivables 9,000
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INCOME STATEMENT FOR THE YEAR ENDED 31/12/2010 (EXTRACT)
RM RM RMOperating Expenses
Bad debts 500
ACCOUNT YEAR-END
BALANCES
ADJUSTMENT BALANCE AFTER
ADJUSTMENT
Accountreceivables 9,000 - 500 8,500
BALANCE SHEET AS AT 31/12/2010 (EXTRACT)
RM RM RM
Current Assets
Account receivables 8,500
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BAD DEBT RECOVERED
Payments received from debtors whose
debts had been written off as bad.
Effect on income statement:A bad debt recovered is considered as revenue;
to increase profit of business.
Effect on balance sheet:
Payments received will increase asset of cash in
the balance sheet.
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WORKED EXAMPLE
Additional information as at 31/12/2010:
One of the debtors whose debt hadpreviously been written off as bad sent a
cheque for RM1,000 in full settlement of the
amount owing.
Trial Balance as at 31/12/2010 (extract)
DR CR
Account Receivables 9,000
Bank 14,000
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INCOME STATEMENT FOR THE YEAR ENDED 31/12/2010 (EXTRACT)
RM RM RM
Other revenues
Bad debts recovered 1,000
ACCOUNT YEAR-END
BALANCES
ADJUSTMENT BALANCE AFTER
ADJUSTMENT
Bank 14,000 + 1,000 15,000
BALANCE SHEET AS AT 31/12/2010 (EXTRACT)
RM RM RM
Current Assets
Account receivables 9,000
Bank 15,000
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DOUBTFUL DEBT AND ALLOWANCE
FOR DOUBTFUL DEBT
Estimation on the amount that will not be collectedis known as doubtful debt.
Allowance for doubtful debt (AFDD) = % x accounts
receivable (after bad debt) Effect on balance sheet:
AFDD reduces accounts receivable
Effect on income statement: In the first year; doubtful debt estimated will be recorded
in full (worked example 1)
For the next and the following year; record only theincrease or decrease in the estimation (worked example
2)
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WORKED EXAMPLE (1)
Additional information as at 31/12/2010:
A debtor owing RM200 was unable to settle
his debt and this amount is to be written offas bad debt.
The allowance for doubtful debt is 2% on the
outstanding accounts receivable.
Trial Balance as at 31/12/2010 (extract)
DR CR
Account Receivables 8,900
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CALCULATION
Allowance for doubtful debt
= % x outstanding accounts receivable
= 2% (8,900 200)= 176
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INCOME STATEMENT FOR THE YEAR ENDED 31/12/2010 (EXTRACT)
RM RM RM
Operating Expenses
Bad debts
Doubtful debt
200
176
ACCOUNT YEAR-END
BALANCES
ADJUSTMENT BALANCE AFTER
ADJUSTMENT
Account
receivables
8,900 - 200 8,700
BALANCE SHEET AS AT 31/12/2010 (EXTRACT)
RM RM RM
Current Assets
Account receivables
(-) Allowance for doubtful
debt
8,700
(176) 8,524
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WORKED EXAMPLE (2)
Additional information as at 31/12/2010:
One of the customer was declared bankrupt and
unable to settle his debts. The customer still owedRM2,000.
The allowance for doubtful debt is 5% on the
outstanding accounts receivable.
Trial Balance as at 31/12/2010 (extract)DR CR
Account Receivables 50,000
Allowance for doubtful debts 1,000Bad debts 1,000
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CALCULATION
Allowance for doubtful debt
= % x outstanding accounts receivable
= 5% (50,000 2,000)= 2,400
AFDD 1,000
Adjusted to 2,400
Increase in doubtful debt 1,400
ACCOUNT YEAR END ADJUSTMENT BALANCE AFTER
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INCOME STATEMENT FOR THE YEAR ENDED 31/12/2010 (EXTRACT)
RM RM RMOperating Expenses
Bad debts
Doubtful debt
3,000
1,400
ACCOUNT YEAR-END
BALANCES
ADJUSTMENT BALANCE AFTER
ADJUSTMENT
Account
receivables
50,000 - 2,000 48,000
Bad debts 1,000 + 2,000 3,000
Allowance for
doubtful debt
1,000 + 1,400 2,400
BALANCE SHEET AS AT 31/12/2010 (EXTRACT)
RM RM RM
Current Assets
Account receivables
(-) Allowance for doubtful
debt
48,000
(2,400) 45,600
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DISCOUNT ALLOWABLE AND ALLOWANCE
FOR DISCOUNT ALLOWABLE (AFDA)
Estimation on the amount of discount that may beallowed to customers who may pay within thediscount period.
AFDA = % x ((accounts receivable (after bad debt) AFDD)
Effect on balance sheet:AFDA reduces accounts receivable
Effect on income statement: In the first year; discount allowable estimated will be
recorded in full (worked example 1)
For the next and the following year; record only the
increase or decrease in the estimation (worked example2)
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WORKED EXAMPLE (1)
Additional information as at 31/12/2010:
Debts of RM500 are to be written off as bad.
The allowance for doubtful debt and discountallowable are 2% and 1% respectively of the
outstanding accounts receivable.
Trial Balance as at 31/12/2010 (extract)
DR CR
Account Receivables 200,000
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CALCULATION
Allowance for doubtful debt
= % x outstanding accounts receivable
= 2% (200,000 500)
= 3,990
Allowance for discount allowable
= % x (outstanding accounts receivableAFDD)
= 1% ((200,000 500) 3,990)
= 1,955
ACCOUNT YEAR END ADJUSTMENT BALANCE AFTER
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INCOME STATEMENT FOR THE YEAR ENDED 31/12/2010 (EXTRACT)
RM RM RM
Operating Expenses
Bad debts
Doubtful debtDiscount allowable
500
3,9901,995
ACCOUNT YEAR-END
BALANCES
ADJUSTMENT BALANCE AFTER
ADJUSTMENT
Account
receivables
200,000 - 500 199,500
BALANCE SHEET AS AT 31/12/2010 (EXTRACT)
RM RM RM
Current Assets
Account receivables
(-) Allowance for doubtful
debt
(-) Allowance for discountallowable
199,500
(3,990)
(1,995) 193,515
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WORKED EXAMPLE (2)
Additional information as at 31/12/2010:
Allowance for doubtful debts to be increased to
RM1200; and the allowance for discount allowable
to be based on 2% of net accounts receivable.
Trial Balance as at 31/12/2010 (extract)
DR CR
Account Receivables 39,600
Bad debts 1,290
Allowance for doubtful debts 900
Allowance for discount allowable 300
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CALCULATION
AFDD = 1,200
AFDD 900
Adjusted to 1,200
Increase in doubtful debt 300
AFDA = 2% (( 39,600) 1,200)
= 768
AFDA 300
Adjusted to 768
Increase in discount allowable 468
ACCOUNT YEAR-END ADJUSTMENT BALANCE AFTER
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INCOME STATEMENT FOR THE YEAR ENDED 31/12/2010 (EXTRACT)
RM RM RM
Operating Expenses
Bad debts
Doubtful debt
Discount allowable
1,290
300
468
ACCOUNT YEAR-END
BALANCES
ADJUSTMENT BALANCE AFTER
ADJUSTMENT
Account receivables 39,600 0 39,600
Allowance for doubtful
debt
900 + 300 1,200
Allowance for discount
allowable
300 + 468 768
BALANCE SHEET AS AT 31/12/2010 (EXTRACT)
RM RM RM
Current Assets
Account receivables
(-) Allowance for doubtful debt
(-) Allowance for discount allowable
39,600
(1,200)
(768) 37,632
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JOURNAL ENTRIESTRANSACTION DR CR
a To record bad debts writtenoff from accounts receivable Bad debts Acc. receivable
b To record the recovery of bad
debts
Cash/bank Bad debts
recovered
c To record an increase in
doubtful debt estimation
Doubtful debts Allowance for
doubtful debt
d To record a decrease in
doubtful debt estimation
Allowance for
doubtful debt
Doubtful debts
e To record increase in
allowance for discount
allowable
Discount
allowable
Allowance for
discount
allowable
f To record decrease in
allowance for discount
allowable
Allowance for
discount
allowable
Discount
allowable
g To record discount allowed todebtors Discountallowed Acc. receivable