Heintz & Parry

20thth Edition
Chapter 16
Accounting
Accounting for
for
College
College Accounting
Accounting Accounts
Accounts Receivable
Receivable

1
Apply the allowance
method of accounting for
uncollectible accounts.
SALES ON ACCOUNT
• Offering customers the ability to pay “on
account”
– Increases sales
• But, some customers do not pay
– This is considered an expense
– Two methods of accounting for this
expense:
• Allowance method
• Direct write-off method

ALLOWANCE METHOD
2
• A method that recognizes bad debt
expense in the same period that the
related credit sales are made Apply the percentage of
– Consistent with the matching principle sales and percentage of
• Three-step process:
receivables methods of
– Step #1—Estimate amount of
uncollectible accounts estimating uncollectible
– Step #2—Adjusting entry is made accounts.
– Step #3—Subsequently, specific
uncollectible accounts are identified
and written off
 STEP #1 ESTIMATING
PERCENTAGE OF SALES METHOD
UNCOLLECTIBLE ACCOUNTS
• Two methods: Step #1 Determine the % of credit sales
– Percentage of sales method
expected to become uncollectible
• Based on the relationship between the
amount of credit sales and the amount of This can be done by looking at the
uncollectible accounts company’s prior credit experience,
– Percentage of receivables method industry averages, or percentages
• Based on the relationship between the for similar companies.
amount of accounts receivable and the
amount of uncollectible accounts

PERCENTAGE OF SALES METHOD PERCENTAGE OF SALES METHOD

EXAMPLE: During the next year, Chris Co. has

EXAMPLE: Chris Co. had total credit sales of
credit sales of $120,000. What amount should
$200,000, and $2,000 of those credit sales
be recorded as “Bad Debt Expense” for this
had become uncollectible.
year?

Uncollectible Accounts $2,000

= = 1% Estimated
Credit Sales $200,000 Credit Est. %
Uncollectible
Sales × Uncollectible =
Accounts
This is used in future periods to
estimate uncollectible accounts. $120,000 × 1% = $1,200

GENERAL JOURNAL
PERCENTAGE OF SALES METHOD
DATE DESCRIPTION PR DEBIT CREDIT
1 Adjusting Entries Subsequent write-offs
20--
2 Dec. 31 Bad Debt Expense 1,200
3 Allowance for Bad Debts 1,200
4
5
6 Let’s look at how write-offs are
recorded under the allowance method.
7 The income statement will show…
8 Revenues (Sales) of $120,000
9 and Bad Debt Expense of $1,200.
10
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 GENERAL JOURNAL
PERCENTAGE OF SALES METHOD
DATE DESCRIPTION PR DEBIT CREDIT
1 Allowance for Bad Debts 1,100
Subsequent write-offs
2 Accts. Rec./Cust. Names 1,100
3
4
5
Under the allowance method, The allowance account, accounts receivable
6
write-offs affect the account, and subsidiary ledger account
balance sheet only! 7 are all reduced.
8
9
10
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GENERAL JOURNAL PERCENTAGE OF RECEIVABLES

METHOD
DATE DESCRIPTION PR DEBIT CREDIT
1 Allowance for Bad Debts 1,100
2 Accts. Rec./Cust. Names 1,100 Simplest form: Apply an estimated
3 percentage of uncollectible accounts to the
4 Accounts Receivable balance, to determine
“Estimated Uncollectible Accounts”
5 The bad debt expense account is not affected.
6 The expense of this uncollectible account was
7 recognized in the adjusting entry in the
8 period of the related sale.
9
10
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PERCENTAGE OF RECEIVABLES PERCENTAGE OF RECEIVABLES

METHOD METHOD
EXAMPLE: At the end of the current year the
EXAMPLE: Craft Co. had an average Accounts
Accounts Receivable balance was $120,000.
Receivable balance at the end of the past two
What amount should be recorded as “Bad
years of $110,000, and average uncollectible
Debt Expense” for this year?
accounts of $4,400.

Avg. Uncollectible Accts. $4,400 Estimated

= = 4% Accts. Est. %
Average Accounts × Uncollectible
$110,000 Rec. Uncollectible =
Receivable Accounts
This is used in future periods to $120,000 × 4% = $4,800
estimate uncollectible accounts.
 GENERAL JOURNAL
AGING THE RECEIVABLES
DATE DESCRIPTION PR DEBIT CREDIT
1 Adjusting Entries • An aging schedule is prepared, which
20--
4,800
details:
2 Dec. 31 Bad Debt Expense
3 – Each customer’s account balance and
Allowance for Bad Debts 4,800
4
how long it has been outstanding
5 – Estimated percentage uncollectible
based on the “age” of the account
6
7
• This computes a more precise estimate of
Assuming the allowance account has a
uncollectible accounts
8 zero balance prior to this adjustment.
9
10
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AGING SCHEDULE OF ACCOUNTS RECEIVABLE—Dec 31, 20-1 AGING SCHEDULE OF ACCOUNTS RECEIVABLE—Dec 31, 20-1

Customer Total Not Yet Due 1-30 31-60 61-90 91-180 181-365 Over 365
W. Billiard $ 3,000 $ 2,500 $ 500
K. Campbell 950 $ 650 $ 300
J. Farley 4,325 3,800 $ 525
L. Gilbert 1,900 1,500 400
E. Rome 3,950 3,170 $ 780

B. Zimmerman 200 200

Customers and balances The balances are separated

are listed. and classified by how long they
have been outstanding.

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AGING SCHEDULE OF ACCOUNTS RECEIVABLE—Dec 31, 20-1 AGING SCHEDULE OF ACCOUNTS RECEIVABLE—Dec 31, 20-1

Customer Total Not Yet Due Customer Total Not Yet Due
W. Billiard $ 3,000 $ 2,500 W. Billiard $ 3,000 $ 2,500
K. Campbell 950 K. Campbell 950
J. Farley 4,325 3,800 J. Farley 4,325 3,800
L. Gilbert 1,900 1,500 L. Gilbert 1,900 1,500
E. Rome 3,950 3,170 E. Rome 3,950 3,170

B. Zimmerman 200 B. Zimmerman 200

Total $100,500 $65,000 Total $100,500 $65,000

Estimated percent uncollectibles 2%

Total est. uncollectible accounts $1,300

Each category is totaled.
Percentages, based on past experience
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are applied to each category.
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 AGING SCHEDULE OF ACCOUNTS RECEIVABLE—Dec 31, 20-1 AGING SCHEDULE OF ACCOUNTS RECEIVABLE—Dec 31, 20-1

1-30 31-60 61-90 91-180 181-365 Over 365 Customer Total Not Yet Due
$ 500 W. Billiard $ 3,000 $ 2,500
$ 650 $ 300 K. Campbell 950
$ 525 J. Farley 4,325 3,800
400 L. Gilbert 1,900 1,500
The percentage increases as the accounts
$ 780 E. Rome 3,950 3,170
become older and less likely to be collected.
200 B. Zimmerman
All the categories’ estimated
200
$18,000 $8,250 $6,310 $1,810 $780 $350 Total uncollectible accounts are totaled. $65,000
$100,500

5% 10% 20% 30% 50% 80% Estimated percent uncollectibles 2%

$ 900 $ 825 $1,262 $ 543 $390 $280 Total est. uncollectible accounts $ 5,500 $ 1,300

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GENERAL JOURNAL GENERAL JOURNAL

DATE DESCRIPTION PR DEBIT CREDIT DATE DESCRIPTION PR DEBIT CREDIT

1 Adjusting Entries 1 Allowance for Bad Debts 5,200
20--
2 Dec. 31 Bad Debt Expense 5,500 2 Accts. Rec./Cust. Names 5,200
3 Allowance for Bad Debts 5,500 3
4 4
5 5
6 6 During the year, accounts
totaling $5,200 are written off.
7 Assuming the allowance account has a 7
8 zero balance prior to this adjustment. 8
9 9
10 10
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AGING THE RECEIVABLES AGING THE RECEIVABLES

Allowance for Bad Debts EXAMPLE: At the end of 20-2, another aging
schedule is prepared, and it shows estimated
5,500 12/31/-1 Adj. uncollectible accounts of $5,700.
Write-offs
during 20-2 5,200
300 12/31/-2 Bal.
The $5,700 is the balance needed
After write-offs, the allowance account in the allowance account.
is left with a $300 credit balance.
 AGING THE RECEIVABLES AGING THE RECEIVABLES

Allowance for Bad Debts Allowance for Bad Debts

Write-offs 5,500 12/31/-1 Adj. Write-offs 5,500 12/31/-1 Adj.
during 20-2 5,200 during 20-2 5,200
300 12/31/-2 Bal. 300 12/31/-2 Bal.

An adjustment of
5,400 Adj.
$5,400 is needed.
5,700 Desired 5,700 Desired
Need a balance of $5,700, 12/31/-2 Bal. 12/31/-2 Bal.
but the balance is only $300.

COMPARISON OF ALLOWANCE COMPARISON OF ALLOWANCE

METHODS METHODS

PERCENTAGE PERCENTAGE OF PERCENTAGE PERCENTAGE OF

FEATURE OF SALES RECEIVABLES FEATURE OF SALES RECEIVABLES
Basis for % of credit sales Aging (%) of accounts Balance after Amount calculated above Amount calculated
estimate receivable adjustment plus debit balance in above
allowance account before
Amount of Amount calculated Amount calculated above
adjustment or minus
year-end above plus debit balance in
credit balance in
adjustment allowance account before
allowance account before
adjustment or minus
adjustment
credit balance in
allowance account before
adjustment

RECOVERY OF A PREVIOUSLY
EFFECT OF WRITE-OFFS WRITTEN-OFF ACCOUNT

• On the income statement EXAMPLE: A check for $500 was received on

– No effect February 1 from Bill McDonald, whose
– The expense was already recognized account was written off on January 15.
during the adjusting entry
• On the balance sheet
– No effect overall
– The write-off decreases both the asset This requires two entries!
(Accounts Receivable) and the contra-
asset (Allowance for Bad Debts)
 GENERAL JOURNAL GENERAL JOURNAL

DATE DESCRIPTION PR DEBIT CREDIT DATE DESCRIPTION PR DEBIT CREDIT

20-- 20--
1 Feb. 1 Accts. Rec./B. McDonald 500 1 Feb. 1 Accts. Rec./B. McDonald 500
2 Allowance for Bad Debts 500 2 Allowance for Bad Debts 500
3 Reinstated acct. receivable 3 Reinstated acct. receivable
4 4
5 5 1 Cash 500
6 Step #1 6 Accts. Rec./B. McDonald 500
7 Reinstate the account 7 Collection on account
8 (reverse the write-off). 8
9 9 Step #2
10 10 Record the collection.
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DIRECT WRITE-OFF METHOD

3
• Bad Debt Expense is not recognized until it has
been determined that an account is uncollectible
Apply the direct write-off
• Advantage:
method of accounting for – It’s simple
uncollectible accounts. • Disadvantages:
– Violates the matching principle
– The amount of the expense can be
manipulated
– The balance sheet does not reflect the amount
of Accounts Receivable actually expected to
be received

GENERAL JOURNAL GENERAL JOURNAL

DATE DESCRIPTION PR DEBIT CREDIT DATE DESCRIPTION PR DEBIT CREDIT

20X1 20X1
1 Aug. 15 Bad Debt Expense 500 1 Aug. 15 Bad Debt Expense 500
2 Accts. Rec./J. Lafollette 500 2 Accts. Rec./J. Lafollette 500
3 3
4 4
5 5
If he subsequently pays the $500
6 J. Lafollete’s account is written off 6
under the direct write-off method. IN THE SAME ACCOUNTING PERIOD,
7 7 two entries are needed.
8 8
9 9
10 10
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 GENERAL JOURNAL GENERAL JOURNAL

DATE DESCRIPTION PR DEBIT CREDIT DATE DESCRIPTION PR DEBIT CREDIT

20X1 20X1
1 Aug. 15 Bad Debt Expense 500 1 Aug. 15 Bad Debt Expense 500
2 Accts. Rec./J. Lafollette 500 2 Accts. Rec./J. Lafollette 500
3 3
4 Dec. 20 Accts. Rec./J. Lafollette 500 4 Dec. 20 Accts. Rec./J. Lafollette 500
5 Bad Debt Expense 500 5 Bad Debt Expense 500
6 6
7 7 20 Cash 500
8 Step #1 8 Accts. Rec./J. Lafollette 500
9 Reinstate the account 9
(reverse the write-off). Step #2 Record the collection.
10 10
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GENERAL JOURNAL GENERAL JOURNAL

DATE DESCRIPTION PR DEBIT CREDIT DATE DESCRIPTION PR DEBIT CREDIT

20X1 20X1
1 Aug. 15 Bad Debt Expense 500 1 Aug. 15 Bad Debt Expense 500
2 Accts. Rec./J. Lafollette 500 2 Accts. Rec./J. Lafollette 500
3 3
20X2
4 4 Jan. 20 Accts. Rec./J. Lafollette 500
5 5 Uncol. Accts. Recovered 500
6 Now let’s see how the entries would be 6
different if he subsequently pays the $500, Step #1
7 7
IN A DIFFERENT ACCOUNTING PERIOD. Reinstate the account
8 8
crediting a REVENUE account
9 9
instead of subtracting from
10 10
Bad Debt Expense.
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GENERAL JOURNAL

DATE DESCRIPTION PR DEBIT CREDIT

20X1
1 Aug. 15 Bad Debts Expense 500
2 Accts. Rec./J. Lafollette 500
3
20X2
4 Jan. 20 Accts. Rec./J. Lafollette 500
5 Uncol. Accts. Recovered 500
6
7 20 Cash 500
8 Accts. Rec./J. Lafollette 500
9
10 Step #2
11 Record the collection.
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