Chapter 7 Lecture on Bad Debt - Chapter 7 Lecture 2...

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Chapter 7 Lecture 2 Accounts Receivable And now for something completely different. ..Accounts Receivable :   When you sell on account, you debit accounts receivable and credit sales. When you get paid, you debit cash and credit accounts receivable. But, what if you don’t get paid? After exhausting all your collection efforts (“The number you have reached is no longer in service, and there is no new number!”), you no longer have an asset that is expected to provide future benefit, and therefore has no value. To put it simply, you need to write-off (or charge-off, or eliminate the value of) the account receivable. One way is to simply debit bad-debt expense, and credit accounts receivable for the amount owed. That approach is known as the direct method of accounting for uncollectible accounts, and it violates both the revenue recognition rules and the matching rules. If your sale is recorded in one fiscal period, and the write-off is recorded in the next period, then net income is overstated in the first period and understated in the next period. Somehow, we need to match the bad debts to the credit sales, and hence the need to estimate bad debts and establish an allowance for bad debts as a contra account to
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This note was uploaded on 02/10/2011 for the course ACCOUNTING 201 taught by Professor Notsure during the Spring '11 term at Edmonds Community College.

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Chapter 7 Lecture on Bad Debt - Chapter 7 Lecture 2...

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