Chapter 8 outline

Accounting: Tools for Business Decision Making

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Unformatted text preview: Chapter 8 – Reporting and Analyzing Receivables A. Valuing Accounts Receivable Accounts of customers who do not pay what they promised are uncollectible accounts, commonly called bad debts . Two methods are used to account for uncollectible accounts. 1. Direct Write-off Method • No entry until account is known to be uncollectible. • Fails matching test. • Overstates receivables on balance sheet. • Not GAAP unless bad debts amount is insignificant. 2. Allowance Method When allowance method is used, bad debts are estimated and reported in the Allowance for Doubtful Accounts (a contra-asset account) on the balance sheet. That way we can report the full amount of accounts receivable, and the amount we estimate we won’t collect (the allowance), and the amount we estimate we will collect (the realizable value, which equals A/R minus the allowance). Note that the Realizable Value is added to the other assets to get total assets. See page 375. Why use the allowance account? We know some receivables will not be collected, but we don’t know who will not pay. Can’t reduce accounts receivable because control account must equal A/R subsidiary ledger, and we won’t write off a customer’s balance until we know it is uncollectible. •...
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Chapter 8 outline - Chapter 8 – Reporting and Analyzing...

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