Accounts Receivable

Example: Accounts receivable:
Increases with sales
Decreases with collections and write-offs

1) credit sales for the current period
2) collections from customers for the current period
3) write-offs during the current period
4) estimate of bad debt expense at the end of the period

1) Record credit sales for the period:

Cash                                              720,000
Accounts Receivable              3,280,000
       Sales                                            4,000,000

2) Collections from customers:

Cash 3,175,000
Accounts Receivable 3,175,000

3) Write-Offs

Allowance for uncollectible accounts   43,000
       Accounts Receivable                                  43,000

4) Estimate bad debt expense

    Beginning accounts receivable     798,000
+ credit sales                                    3,280,000
– collections                                    (3,175,000)
– write-offs                                           (43,000)
= Ending accounts receivable          860,000

Ending accounts receivable**          860,000
x historical % of a/r                                  x .07
= Ending allowance acct balance       60,200

   Beginning allowance balance       (29,000)
– write-offs                                              43,000
+ bad debt expense % a/r                             ??
= ending allowance balance             (60,200)

The allowance account must be increased by $74,200 (negative/credit) to get to the
ending credit balance it must be of 60,200. Bad debt expense is increased for the same
amount

Bad Debt Expense                        74,200
       Allowance for uncollectible accounts        74,200

$170,000 is the estimated uncollectible amount 

The total estimate of what will not be uncollected must be the ending credit balance in the “allowance for uncollectible accounts” account.  An allowance account always has a credit balance.  

The current balance is 32,000 and it must be 170,000 so 138,000 must be added to the account.  Increasing the allowance account is done with a credit.
Bad debt expense is recorded for the same amount.

Bad Debt Expense                   138,000
       Allowance for Uncollectible Accounts        138,000

This method adjusts bad debt from a cumulative balance sheet perspective. 

B.  Using the % of sales method, bad debt expense is calculated:

Record the amount calculated – this directly records the expense in the same period with the sales (matching)

Bad Debt Expense                 70,000
       Allowance for Uncollectible Accounts        70,000

This method adjusts from a current period income statement perspective

C.
Allowance for Uncollectible Accts    11,000
       Accounts Receivable                             11,000

Now that the company knows who and how much the customer is not going to pay, they can take this specific account and the amount of the list of accounts receivable and decrease the accounts receivable account.

The allowance account decreased because this account represents amounts the company does not know exactly who or how much won’t be collected and now the company knows so this amount does not belong in this account.  

The allowance account is decreased with a debit because it is a contra asset account.

1)  credit sales in the current period

2)  collections from customers in the current period

3)  write-offs during the current period

4)  estimate of bad debt expense at the end of the period

1)
Accounts Receivable        1,756,000
       Sales                                             1,756,000

2)
Cash                                     1,669,000
              Accounts Receivable              1,669,000

3)
Allowance for Uncollectible Accts 17,000
              Accounts Receivable                       17,000

4)
Bad debt expense                      28,000
       Allowance for uncollectible accts       28,000

Collections reduce accounts receivable, so use the accounts receivable account to determine the amount collected.  Collections are computed as follows

Collections have to be $1,669,000 for the ending balance to equal 307,000

Bad debt expense is recorded using the allowance account, so use the allowance account to compute the bad debt expense:

Beginning allowance account      (18,000)
+ bad debt expense                            ??
– write-offs                                       17,000
= Ending allowance account        (29,000)

Bad debt has to be $28,000 for the ending balance of the allowance account to equal 29,000 given.  

The allowance account is a contra asset with a negative (credit) balance

A. Without recourse:

b.)
Cash (increase)
           Accounts Receivable (decrease)

c.)
Allowance for Uncollectible Accounts (decrease)
           Accounts Receivable (increase)

d.)
Bad debt expense (increase)
           Allowance for uncollectible accounts (increase)

(always used for % of sales method and % of A/R method)

Allowance for uncollectible accounts (decrease)
           Bad debt expense (decrease)

(used for the % of A/R method when too much expense was recorded in previous periods)