Later when the company finally writes off an

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Later, when the company finally writes off an individual account, it makes the following journal entry: Allowance for Doubtful Accounts XXX Accounts Receivable XXX Notice that the company does not record an expense when it writes-off the account because it had previously expensed the bad debt in a prior period. Also note that the writeoff does not impact the net balance of accounts receivable either. 6-52 Estimating the Uncollectible Account There are two methods used to estimate the periodic bad debt expense. Direct method (based on sales) Percentage of Sales Method Indirect method (based on receivables) Percentage of Receivables (or “Aging” Method) Most companies use both methods together
27 6-53 Bad debt percentage is based on actual uncollectible accounts from prior years’ credit sales . Focus is on determining the amount to record on the income statement as Bad Debt Expense . Net credit sales % Bad debt loss rate Bad Debt Expense Estimating Bad Debts Percentage of Credit Sales Method 6-54 Estimating Bad Debts Percentage of Credit Sales In 2013, Kahului Kid’s Clothes had credit sales of $600,000. Past experience indicates that bad debts are one percent of sales. What is the estimate of bad debts expense for 2013? $600,000 × .01 = $6,000 Prepare the adjusting entry . Date Description Debit Credit Dec. 31 Bad Debt Expense (+E,-SE) 6,000 Allowance for Doubtful Accounts (+XA,-A) 6,000 GENERAL JOURNAL
28 6-55 Writing off a Bad Debt During 2013, Kahului Kid’s Clothes wrote off two uncollectible accounts: Receivable of $3,200 from Wailuku Slipper Shop (original sale in 2012), which went out of business in 2013. Receivable of $2,100 from Pukulani Pansit House (original sale in 2013), which was closed by the Health Department in 2013. Prepare the adjusting entry . Date Description Debit Credit Dec. 31 Allowance for Doubtful Accounts 5,300 Accounts Receivable 5,300 GENERAL JOURNAL 6-56 Example of Allowance Method Sungka Mancala Game Company At the start of 2013, the Sungka Mancala Game Company had a debit balance in Accounts Receivable of $5,360 and a credit balance in the Allowance for Doubtful Accounts of $300. a) During 2013, Sungka Mancala had sales revenue of $70,000, of which $25,000 was on credit. b) Collections of accounts receivable during 2013 amounted to $19,000. c) On December 31, 2013, on the basis of experience, a decision was made to continue the accounting policy of basing estimated bad debt losses on 2.5 percent of credit sales for the year. d) On December 31, 2013, an Account Receivable of $700 from a prior year was determined to be uncollectible; therefore, it was written off immediately as a bad debt.
29 6-57 Sungka Mancala Game Company (Continued) Required:

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