Accounting for Uncollectible Accounts Receivable a Direct Write Off Method for

Accounting for uncollectible accounts receivable a

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Accounting for Uncollectible Accounts Receivable: a. Direct Write-Off Method for Uncollectible Accounts - when company determines a particular account to be uncollectible, it charges loss to Bad Debt Expense 1. Fails to record expenses in the same period as associated revenues 2. Does not state receivables at NRV i. Using direct write-off method is not considered appropriate, except when the amount uncollectible is immaterial Journal Entry for Direct Write-Off Method Bad Debt Expense Accounts Receivable b. Allowance Methods for Uncollectible Accounts - Records an estimate of bad debt expense in the same accounting period as the sale 1. Ensures that companies state receivables on the balance sheet at their NRV 2. FASB requires the allowance method for financial reporting purposes when bad debts are material in amount. Method has three essential features: i. Companies estimate uncollectible, they match this estimated expense against revenue in the same accounting period in which they record the revenue Deduction from sales on Income Statement
ii. Companies debit estimated uncollectible to Bad Debt Expense and credit them to allowance for Doubtful Accounts through adjusting entry at the end of each period iii. When companies write a specific account, they debit actual uncollectible to Allowance for Doubtful Accounts and credit that amount to Accounts Receivable Journal Entry to Record Estimate of Uncollectible Account Bad Debt Expense Allowance for Doubtful Account 1. Allowance for Doubtful Accounts does not get closed at the end of the fiscal year 3. Bad Debt Expense does not increase when the write-off occurs i. Under the allowance method, companies debit every bad debt write-off to the allowance account rather than to Bad Debt Expense 1. Journal entry to record the write-off of an uncollectible account reduces both accounts receivable and Allowance for Doubtful Accounts 4. Recovery of an Uncollectable Account- Collection from a customer after it has written off the account requires two entries: i. Reverses the entry made in writing off the account ii. Journalizes that collection 1. Affects only balance sheet accounts 5. Bases Used for Allowance Method: i. Percentage of Sales (Income Statement)- Management estimates what percentage of credit sales will be uncollectible 1. Percentage based on past experiences and anticipated credit policy Bad debt expenses is related to nominal account (Sales Revenue) any balance in the allowance is ignored Achieves proper matching of cost and revenues Journal Entries for Recovery of an Uncollectable Account Accounts Receivable Allowance for Doubtful Accounts (To reverse write-off account) Cash Accounts Receivable (Collection of Account)
ii. Percentage of Receivables(Balance Sheet)- Reports receivables in the balance sheet at NRV Percentage of Sales Bad Debt Expense Sales Emphasis on Income Statement Relationships Percentage of Receivables Allowance for Doubtful Accounts Accounts Receivable Emphasis on Balance Sheet Relationships
III. Notes Receivable-

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