© 2010 prentice hall business publishing, college accounting: a practical approach, 11e by slater...
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© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater
Accounting for Bad DebtsAccounting for Bad Debts
Chapter 13
Learning Objective 1Learning Objective 1
Describing how the Bad Debts Expense account and the Allowance for Doubtful Accounts account are used to record bad debts
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater
LO-1
Bad Debts Bad Debts Debts that come from credit
customers who do not pay their bills
Affects a company’s credit policyCannot grant credit to just any
company
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater
LO-1
Bad DebtsBad Debts
On December 1, 2008, Corey Co. sold merchandise on account for $5,000.
On July 1, 2009, Corey Co. determines that the $5,000 will never be collected.
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater
Dec 1Sales of $5,000
recorded
2008 2009
Dec 31End of fiscal year
Jul 1Debt
determinedto be bad
LO-1
Bad DebtsBad Debts
Bad debts expense should be recognized in the accounting period in which the sales were made.
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater
Dec 1Sales of $5,000
recorded
2008 2009
Dec 31End of fiscal year
Jul 1Debt
determinedto be bad
LO-1
Bad DebtsBad Debts
Solution: Estimate how many of the current sales will be uncollectible
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater
Dec 1Sales of $5,000
recorded
2008 2009
Dec 31End of fiscal year
Jul 1Debt
determinedto be bad
Prepare an adjusting entry
LO-1
Allowance for Doubtful Allowance for Doubtful AccountsAccountsIs a contra-asset accountIs subtracted from accounts
receivableAccumulates expected amount of
uncollectibles as of a given date
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater
LO-1
Adjusting Entry for Bad Adjusting Entry for Bad DebtsDebts
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater
General Journal
Page 8 Date Account Titles and
DescriptionPR Dr. Cr.
Dec 31 Bad Debts Expense XXXX
Allowance for
Doubtful Accounts XXXX
Contra-AssetAccount LO-1
Balance Sheet Balance Sheet PresentationPresentation
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater
Current Assets:Cash $ 10,400Accounts receivable $100,000Less: Allowance for doubtful accounts 6,000 94,000Merchandise inventory 300,000Total current assets $404,400
Corbin CompanyCorbin CompanyPartial Balance SheetPartial Balance SheetDecember 31, 200XDecember 31, 200XGross
AmountEstimated to
beUncollectible
Net Realizable
Value
Total Current Assets LO-1
Net Realizable ValueNet Realizable Value
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater
• The amount of Accounts Receivable that is expected to be collected
• Calculated by subtracting Allowance for Doubtful Accounts from Accounts Receivable
LO-1
Writing off an accountWriting off an account
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater
LO-1
General Journal
Page 8
Date Account Titles and Description
PR Dr. Cr.
Jul 1 Allowance for Doubtful
Accounts 5,000
Accounts Receivable-Discello 5,000
Learning Objective 2Learning Objective 2
Using the income statement approach and the balance sheet approach to estimate the amount of Bad Debts Expense
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater
LO-2
Estimating the AmountEstimating the Amount
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater
General Journal
Page 8 Date Account Titles and
DescriptionPR Dr. Cr.
Dec 31 Bad Debts Expense XXXX
Allowance for DoubtfulAccounts XXXX
How is this amount
determined? LO-2
Income Statement Income Statement ApproachApproach
Bad Debts Expense = Percentage of net credit sales
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater
Focus is on measuring the expense, which is reported on Income
Statement.
LO-2
Matching requirement- ignores previous balance of
Allowance for Doubtful Accounts when estimating
Bad Debts Expense for current period.
Exercise 13-2Exercise 13-2Compute Net Sales: Sales
$110,000Sales Returns & Allowances (500)Sales Discounts (9,500) Net Sales $100,000
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater
LO-2
Exercise 13-2Exercise 13-2
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater
LO-2
Exercise 13-2Exercise 13-2
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater
General Journal
Page 8
Date Account Titles and Description
PR Dr. Cr.
Dec 31 Bad Debts Expense 4,000
Allowance for DoubtfulAccounts 4,000
LO-2
Exercise 13-2Exercise 13-2
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater
Accounts ReceivableBal. 30,000
Allowance forDoubtful Accounts
5,0004,000 Adj.
$9,000 Bal.
Any existing balance in theAny existing balance in theAllowance account is ignored.Allowance account is ignored.
LO-2
Balance Sheet ApproachBalance Sheet ApproachAdjusting entries are based on bringing the
Allowance account to a required amount.Method is based on the Accounts Receivable
amount and the aging process.
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater
LO-2
Balance Sheet ApproachBalance Sheet ApproachNet realizable value - The amount (accounts
receivable – Allowance for doubtful accounts) that is expected to be collected.
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater
Focus is on determining the net realizable value of Accounts Receivable, which is reported on Balance Sheet
LO-2
Learning Objective 3Learning Objective 3
Preparing an Aging of Accounts Receivable
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater
LO-3
ExampleExample
Mayfair Co. has the following balances in its accounts at the end of 2008
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater
Accounts ReceivableBal. 30,000
Allowance forDoubtful Accounts
500
LO-3
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater
The following aging schedule is prepared The following aging schedule is prepared for the end of the year. Complete the for the end of the year. Complete the schedule.schedule.
LO-3
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater
ExampleExample
Accounts ReceivableBal. 30,000
Allowance forDoubtful Accounts
500
Desired balance 2,679
2,179
LO-3
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater
What if the Allowance account had What if the Allowance account had a debit balance of $500 before a debit balance of $500 before adjustment?adjustment?
Accounts ReceivableBal. 30,000
Allowance forDoubtful Accounts 500
Desired balance 2,679
3,179
LO-3
Learning Objective 4 Learning Objective 4
Writing off an account using the Allowance for Doubtful Accounts method
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater
LO-4
Allowance for Doubtful Allowance for Doubtful AccountsAccountsWhen a company deems an account
uncollectible, it is written off and no longer considers it an asset.
When the journal entry is made, allowance for doubtful accounts and accounts receivable are reduced.
Example: J. Monaco’s account balance of $500 is deemed uncollectible on June 1, 20X8.
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater
LO-4
General Journal
Page 8
Date Account Titles and Description PR Dr. Cr.
20X8
Jun 1 Allowance for Doubtful Accounts 500
Accounts Receivable, J. Monaco 500
Recording Recovered Debts Recording Recovered Debts using Allowance for Doubtful using Allowance for Doubtful Accounts Accounts Example: Assume J. Monaco paid half of
his account balance of $500 on January 3, 20X9.
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater
LO-4
General Journal
Page 8
Date Account Titles and Description PR Dr. Cr.
20X9
Jan 3 Accounts Receivable, J. Monaco 250
Allowance for Doubtful Accounts 250
Restores collectible portion
3 Cash 250
Accounts Receivable, J. Monaco 250
Records payment received
Writing off an account using the Allowance for Doubtful Accounts account
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater
LO-2, 4
Exercise 13-4 (a)Exercise 13-4 (a)
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater
LO-2, 4
Exercise 13-4 (a)Exercise 13-4 (a)
Accts. Rec., Angie Ring
Accts. Rec., Mike Catuc
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater
LO-2, 4
Exercise 13-4 (a)Exercise 13-4 (a)
Accts. Rec., Mike Catuc
Accts. Rec., Mike Catuc
Learning Objective 5Learning Objective 5
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater
LO-5
Using the direct write-off method
Direct Write-Off MethodDirect Write-Off MethodUsed when a company cannot
reasonably estimate bad debt expense
Uncollectible accounts are directly written off to current year’s bad debt expense
The year sale was made does not matter
Allowance for doubtful accounts is not used
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater
LO-5
Direct Write-Off MethodDirect Write-Off MethodExample: T. DeStadio’s account
balance of $400 is deemed to be uncollectible on May 15, 20X7.
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater
LO-5
General Journal
Page 8
Date Account Titles and Description PR Dr. Cr.
20X7
May 15 Bad Debts Expense 400
Accounts Receivable, T DeStadio 400
Wrote off account
Direct Write-Off MethodDirect Write-Off MethodRecording Recovered Debts in same
yearAssume T. DeStadio paid $200 of his balance
July 3, 20X7.Reverse the entry made prior by $200
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater
LO-5
General Journal
Page 8
Date Account Titles and Description PR Dr. Cr.
20X7
July 3 Accounts Receivable, T DeStadio 200
Bad Debts Expense 200
Direct Write-Off MethodDirect Write-Off MethodRecording Recovered Debts in different
year A new account- Bad Debts Recovered is used Assume T. DeStadio paid $200 of his balance on July
3, 20X8.
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater
LO-5
General Journal
Page 8
Date Account Titles and Description PR Dr. Cr.
20X8
July 3 Accounts Receivable, T DeStadio 200
Bad Debts Recovered 200
Restores collectible portion
3 Cash 200
Accounts Receivable, T DeStadio 200
Records payment received
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater
Exercise 13-4 (b)Exercise 13-4 (b)
LO-5
Accts. Rec., Angie Ring
Accts. Rec., Mike Catuc
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater
Exercise 13-4 (b)Exercise 13-4 (b)
LO-5
Accts. Rec., Mike Catuc
Accts. Rec., Mike Catuc
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater
End of Chapter 13