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An uncollectible receivable is called "Bad Debt Expense" or "______ Accounts Expense".
An uncollectible receivable is called "Bad Debt Expense" or "______ Accounts Expense".
Doubtful
The ______ Write-off Method records bad debt expense when a specific account is ascertained or proven to be uncollectible.
The ______ Write-off Method records bad debt expense when a specific account is ascertained or proven to be uncollectible.
Direct
[Blank] Realizable Value is the net amount a company expects to collect from accounts receivable.
[Blank] Realizable Value is the net amount a company expects to collect from accounts receivable.
Net
The ______ for bad debts account is a contra-asset account and is presented as a deduction against the amount of accounts receivables.
The ______ for bad debts account is a contra-asset account and is presented as a deduction against the amount of accounts receivables.
The ______ Method estimates and records Bad Debts Expense in the year the business sells goods or services on account.
The ______ Method estimates and records Bad Debts Expense in the year the business sells goods or services on account.
GAAP stands for Generally ______ Accounting Principles.
GAAP stands for Generally ______ Accounting Principles.
% of ______ Sales method calculates bad debt expense as a percentage of account sales or revenues made on credit.
% of ______ Sales method calculates bad debt expense as a percentage of account sales or revenues made on credit.
The required balance of ______ for bad debts is computed as a percentage of the ending receivable balance under the percent of receivables method.
The required balance of ______ for bad debts is computed as a percentage of the ending receivable balance under the percent of receivables method.
In the T-account for Allowance for Bad Debts, ______ balance and Bad Debts Expense increase the allowance for bad debts.
In the T-account for Allowance for Bad Debts, ______ balance and Bad Debts Expense increase the allowance for bad debts.
Businesses involved in ______ are particularly exposed to bad debts due to the volume of their transactions made on credit with customers.
Businesses involved in ______ are particularly exposed to bad debts due to the volume of their transactions made on credit with customers.
Flashcards
Bad Debt Expense
Bad Debt Expense
A possibility that receivables from clients will not be fully collected.
Direct Write-off Method
Direct Write-off Method
Bad debt expense is recorded when a specific account is ascertained.
Net Realizable Value
Net Realizable Value
The net expected amount to be collectible from receivable after adjusting for expected unrecoverable accounts.
Allowance Method
Allowance Method
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% of Account Sales
% of Account Sales
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% of Receivable
% of Receivable
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Study Notes
- An uncollectible receivable from clients is a "BAD DEBT EXPENSE" or "DOUBTFUL ACCOUNTS EXPENSE".
- Bad debt expense recording methods include the Direct Write-off Method and the Allowance Method.
- The Allowance Method is generally more common.
Direct Write-Off Method
- Bad debt expense records are noted when an account is ascertained or proven to be uncollectible, which may not occur in the period of sale.
- It doesn't attempt to match revenues and expenses.
- It does not result in receivables being stated at net realizable value on the balance sheet.
- Net Realizable Value is the expected collectible amount from receivable after adjusting for unrecoverable accounts.
- It represents the remaining amount after deducting sure uncollectible amounts.
- In 2020, a business made P400,000 in service income, with P100,000 on accounts, and 2% expected to be non-collectible; in 2021, P1,400 were proven uncollectible.
- There is no entry in 2020 even though 2% is expected to be non-collectible; bad debts expense and allowance for bad debts are recorded as illustrated in pro-forma adjusting entries.
- Instead of allowance for bad debts, the accounts receivable are credited to remove the amount from records of receivables, due to the certainty of it not being collected.
- Under the Direct Write-Off Method, one will record an adjusting entry for bad debts when 100% can't collect the amount due to various reasons.
- If the client recovers and is able to pay, recover the amount owed.
Allowance for Bad Debts
- A contra-asset account is presented as a deduction against the amount of accounts receivables on the balance sheet.
- Net Realizable Value = Accounts Receivable - Allowance for Bad Debts
Allowance Method
- Bad Debts Expense is estimated and recorded as an expense in the year a business sells goods or services on credit.
- The business incurs a loss when it sells goods or services to non-paying customers, not when the receivable determines to be uncollectible.
- This method is prescribed by generally accepted accounting principles (GAAP), called the GAAP METHOD.
Estimating Bad Debts Under Allowance Method
- Percentage of account sales involves bad debt expense, equaling a percentage of account sales or revenues made on credit.
- Percentage of receivable involves the required balance of allowance for bad debts computed as a percentage of the ending receivable balance.
- The bad debt expense is determined based on the change in the balance of the allowance account.
Percentage of Receivable Method
- The estimated bad debt rate is multiplied by the balance of accounts receivable for the required allowance for bad debts.
- The bad debt expense is established by analyzing the allowance account.
- Before preparing financial statements on December 31, 2020, a business has P200,000 accounts receivables.
- Based on past experience, about 5% of receivables will not be collected.
- On April 4, 2020, P4,000 accounts were proven to be uncollectible with a balance of P5,000 from last year.
- The Net Realizable Value is computed as follows: NRV = Accounts Receivable - Allowance for Bad Debts
- Bad Debts Expense is not an issue for service businesses as services are sold for cash.
- There is an exposure to bad debts for businesses involved in trading due to credit transactions with customers.
- Trading businesses use methods to estimate bad debts.
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