CH8+Reporting+_+Analyzing+Rec+09f-1 - 1 ACCT 207 Chapter 8...

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1 ACCT 207 Chapter 8 - Reporting and Analyzing Receivables I. Bad Debt Expense and Allowance for Bad Debt In accrual accounting, a revenue is recorded when the service is performed regardless of when payment is received. So, at year end, an analysis must be performed to see how many accounts receivables will not be collected. (Matching principle) A. Two allowance methods acceptable under GAAP: 1. Aging accounts receivable. Also called % of receivables or balance sheet approach. 2. % of credit sales (not responsible for the calculation of this method). Each method gives you an estimate (although slightly different amounts) of uncollectibles. AJE requires you to record the expense MATCHED to the period of the sale rather than when you know specifically who the “deadbeat” is. Adjusting Journal Entry: (in period of sale) based on ESTIMATES dr: Bad Debt Exp (E ↑ NI ↓ SE ↓ ) cr: Allowance for Bad Debt (XA ↑ A ↓ ) Synonyms: Bad debt = uncollectible accounts = doubtful accounts Bad Debt Expense: Tells us the estimated amount of accounts we think will be uncollectible related to this period's revenue --and is on the income statement. Allowance for Bad Debt is a contra-asset account: B/S current assets:
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2 Total owed Accounts Receivable (gross amount) Probably won’t collect Less: Allowance for B/D Hope to actually collect Net realizable value or net cash value Thus, the more in the Allowance the less total assets. AJE (adjusting journal entries) are made at period end.
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CH8+Reporting+_+Analyzing+Rec+09f-1 - 1 ACCT 207 Chapter 8...

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