accounting for uncollectible receivables direct write-off method not gaapnot gaap used for tax...

Accounting for Accounting for Uncollectible ReceivablesUncollectible Receivables

Direct Write-off MethodDirect Write-off Method•not GAAPnot GAAP•used for Tax Purposesused for Tax Purposes

Allowance MethodAllowance Method•is GAAPis GAAP•matches the expense to the revenue matches the expense to the revenue generatedgenerated•values receivables at their net realizable values receivables at their net realizable valuevalue

Expenses are matched to the revenue Expenses are matched to the revenue generated in that accounting periodgenerated in that accounting period

““let the expenses follow the revenues”let the expenses follow the revenues”

Matching PrincipleMatching Principle

Never overstate assets or income.Never overstate assets or income.

Conservatism ConstraintConservatism Constraint

Allowance for Doubtful AccountsAllowance for Doubtful AccountsDebit Debit

Actual amounts written off Actual amounts written off during the periodduring the period

CreditCreditBeginning balanceBeginning balance

Amnts. Recorded as uncollectible Amnts. Recorded as uncollectible accounts expenseaccounts expense

Amnts. Recovered from write-Amnts. Recovered from write-offsoffs= Ending balance= Ending balance

Accounts Receivable Accounts Receivable Debit Debit Beginning balanceBeginning balance

Credit SalesCredit Sales

Reinstated A/R Reinstated A/R previously Written-offpreviously Written-off

Ending BalanceEnding Balance

CreditCredit

Amounts rec’d from CustomersAmounts rec’d from Customers

Accounts Written OffAccounts Written Off

Allowance Methods of Allowance Methods of Valuing ReceivablesValuing Receivables

• Percentage-of-Sales MethodPercentage-of-Sales Method - Income - Income Statement Approach focusing on Statement Approach focusing on matchingmatching the “expense” to the revenue generatedthe “expense” to the revenue generated

• Percentage-of-Receivables MethodPercentage-of-Receivables Method - - Balance Sheet Approach focusing on the Balance Sheet Approach focusing on the balance in the “allowance” calculation to balance in the “allowance” calculation to determine the determine the net realizable value net realizable value following following conservatismconservatism

Accounting Accounting forfor Uncollectible Accounts Uncollectible AccountsAllowance Method (GAAP)Allowance Method (GAAP)

Dr. Bad Debt Expense Dr. Bad Debt Expense $$$$$$Cr. Allowance for Doubtful Accts Cr. Allowance for Doubtful Accts $$$$$$

Adjusting journal entryAdjusting journal entry

Dr. Allowance for Doubtful Accts Dr. Allowance for Doubtful Accts $$$$$$Cr. A/R - Dead BeatCr. A/R - Dead Beat $$$$$$

Write off a specific account as uncollectibleWrite off a specific account as uncollectible

Dr. A/R - Dead BeatDr. A/R - Dead Beat $$$$$$Cr Allowance for Doubtful AcctsCr Allowance for Doubtful Accts $$$$$$

Reinstate account if payment is receivedReinstate account if payment is received

Dr. CashDr. Cash $$$$$$Cr. A/R - DeadbeatCr. A/R - Deadbeat $$$$$$

Apply payment to reinstated accountApply payment to reinstated account

Accounting Accounting forfor Uncollectible Accounts Uncollectible AccountsDirect Write-Off Method (Not GAAP -- used for Tax Purposes)Direct Write-Off Method (Not GAAP -- used for Tax Purposes)

Dr. Bad Debt ExpenseDr. Bad Debt Expense $$$$$$Cr. A/R - Dead Beat Cr. A/R - Dead Beat $$$$$$

Write off a specific account as uncollectibleWrite off a specific account as uncollectible

Dr. A/R - Dead BeatDr. A/R - Dead Beat $$$$$$Cr Bad Debts Expense Cr Bad Debts Expense $$$$$$

Reinstate account if payment is receivedReinstate account if payment is received

Dr. CashDr. Cash $$$$$$Cr. A/R - DeadbeatCr. A/R - Deadbeat $$$$$$

Apply payment to reinstated accountApply payment to reinstated account