Chapter 8 - Chapter 8 Class Notes Reporting and...

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Accounting for Credit Customers Who Don’t Pay (pp. 340-347) When companies make sales on credit, they will eventually incur losses because some customers will not pay for the merchandise they purchase. In fact, most companies expect a percentage of their receivables to be uncollectible. Amounts owed by these customers who don’t pay are called uncollectible accounts, doubtful accounts, or bad debts. Two Methods to Account for Bad Debts Direct write-off method (we do not cover) Allowance method (satisfies the matching principle, so we cover in detail) Remember the Matching Principle from Chapter 4 – expenses must be matched with the revenues they help generate Bad Debts are an expense of making credit sales and should be recorded as an expense in the same accounting period that the sale is recorded . Chapter 8 Class Notes Reporting and Interpreting Receivables, Bad Debt Expense, and Interest Revenue Compiled by: Janice H. Fergusson, CPA Certain Materials used with permission of The McGraw-Hill Companies, Inc.
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ACCT 225 – Fall 2008 Page 2 of 9 Chapter 8 However, a company doesn’t know which specific customers will not pay when the sale is made, so they must estimate the amount of bad debts to record each period . Companies base these estimates on their prior experience or industry averages. Two new accounts: o Bad Debt Expense – a selling expense on the Income Statement (works just like any other expense account) o Allowance for Doubtful Accounts – a contra account to Accounts Receivable on the Balance Sheet Allowance for Doubtful Accounts - + Actual Estimates of Write-offs Bad Debts Net Realizable Value of Accounts Receivable
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Chapter 8 - Chapter 8 Class Notes Reporting and...

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