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Unformatted text preview: Receivables Chapter 8 1 Receivables Assets that represent money claims against other entities (such as people, other businesses, or organizations) Usually arise as a result of making a sale or providing services on credit 2 Common Types of Receivables Accounts Receivable - normally expected to be collected within a short period of time (within 60 days of creation) Notes Receivable normally a longer expected collection time frame Other Receivables (such as interest receivable)
3 Uncollectible Receivables A business usually grants credit to increase sales, but only to those entities are judged to be credit worthy. However, despite best efforts, some receivables will never be paid off. This operating expense is known as Bad Debts Expense.
4 Accounting for Uncollectible Receivables Direct write-off method Allowance method 5 Direct Write-Off Method Records Bad Debt Expense only when a decision has been made to write-off an account receivable Bad Debts Expense Accounts Receivable (debit) (credit) 6 Allowance Method page 1 At the end of the accounting period, an estimate is made for the FUTURE bad debts that will arise as a result of CURRENT credit sales Entry to record estimate: Bad Debts Expense (debit) Allowance for Uncollectible Accts (credit) 7 Allowance Method page 2 AFDA is a contra asset account Entry to write-off an account after it has been deemed uncollectible: AFDA Accounts Receivable (debit) (credit) 8 Allowance Method page 3 Estimating the Allowance: Income Statement Approach Based on a % of credit sales during the accounting period Balance Sheet Approach Based on an aged Accounts Receivable schedule 9 Which method (direct write-off or allowance) is GAAP? Why? 10 The Allowance method is GAAP because it generally matches the Bad Debt Expense with the revenue it generated. Key A reasonably accurate estimate based upon past results and current economic conditions
11 Subsidiary Ledger Any listing of "sub-accounts" that reconcile to a control account in the general ledger. Accounts Receivable, Accounts Payable, and Fixed Assets normally have a subsidiary ledger 12 ...
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- Spring '99