ACCT 320 TUTORIAL_AR and Bad Debt


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ACCT 320 TUTORIAL ACCOUNTS RECEIVABLE AND BAD DEBTS Overview: In order to try and get more people to purchase goods or services, many companies choose to sell products on credit. Sales on credit introduce the possibility that the customer will never make the required payment(s). Accrual accounting theory provides that these non-payments should be an expense in the time period in which the purchases were made. Because a company doesn’t know which credit sales will eventually result in bad debt expense, there are 4 methods used for determining bad debt expense: Direct Write-Off Method: The direct write-off method is by far the easiest method for expensing bad debt, but it has some flaws. Using the direct write-off method simply means that when a company decides that the chances of collecting a debt are unreasonably low and it is going to write-off the debt, it credits accounts receivable for the amount of the initial sale, and makes a corresponding debit entry to bad debt expense. The problem with this method is that it violates the matching principle. If a sale is made today, but it’s not determined to be bad debt until next year, the resulting write-off will cause the initial revenue to not be matched to the expense. If a jewelry store sells a $20,000 ring to a customer on credit, and then later determines that it will most likely never receive payment for the merchandise, the following journal entries would be made. Entries marked (a) are for the initial sale, and those marked (b) are for the bad debt write-off. Accounts Receivable
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This note was uploaded on 06/13/2011 for the course ACCT 2291 taught by Professor Turpin during the Spring '11 term at Troy.

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