Accounting

Accounting for
for Bad
Bad Debts
Debts
BAD DEBTS – cost of doing business on credit.

 Direct Write-off Method

- Requires the recognition of a bad debt loss
only when the accounts proved to be
worthless or uncollectible.
 Allowance Method

- Requires the recognition of a bad debt loss if

the accounts are doubtful of collection.

7-1
 Valuation
Valuation of
of Accounts
Accounts Receivable
Receivable

Methods of Accounting for Uncollectible Accounts

Direct Write-Off Allowance Method

Theoretically undesirable: Losses are Estimated:
No matching Percentage-of-sales
Receivable not stated at Percentage-of-receivables
cash realizable value Aging the accounts
Not IFRS when material in receivable
amount

7-2
 Illustration
Illustration
Allowance Method Direct Write-off Method
1. Accounts of P30,000 are considered doubtful in collection
Doubtful Accounts 30,000 No Entry
Allowance for D/A 30,000
2. The accounts are subsequently discovered to be worthless or uncollectible.
Allowance for D/A 30,000 Bad Debts 30,000
Accounts Receivable 30,000 Accounts Receivable 30,000
3. The same accounts that are previously written-off are unexpectedly
recovered or collected.
Accounts Receivable 30,000 Accounts Receivable 30,000
Allowance for D/A 30,000 Bad Debts 30,000
Cash 30,000 Cash 30,000
Accounts Receivable 30,000 Accounts Receivable 30,000

7-3
 Methods
Methods of
of Estimating
Estimating Doubtful
Doubtful Accounts
Accounts
Illustration 7-7

Emphasis
Emphasison on
the
theIncome
Income
Statement
Statement

Emphasis
Emphasison on
the
theStatement
Statement
of
ofFinancial
Financial
Position
Position

7-4
 Uncollectible
Uncollectible Accounts
Accounts Receivable
Receivable

Percentage-of-Sales Approach

Percentage based upon past experience and anticipate

credit policy.

Achieves proper matching of costs with revenues.

Existing balance in Allowance account not considered.

7-5
 Uncollectible
Uncollectible Accounts
Accounts Receivable
Receivable

Percentage-of-Sales Approach

Illustration: Gonzalez Company estimates from past experience

that about 1% of credit sales become uncollectible. If net credit
sales are $800,000 in 2011, it records bad debt expense as
follows.
Bad Debt Expense 8,000
Allowance for Doubtful Accounts
8,000
Illustration 7-8

7-6 LO 5
 Uncollectible
Uncollectible Accounts
Accounts Receivable
Receivable

Percentage-of-Receivables Approach
Reports receivables at cash realizable value.

Companies may apply this method using

► one composite rate, or

► an aging schedule using different rates.

7-7
 Uncollectible
Uncollectible Accounts
Accounts Receivable
Receivable
Illustration 7-9
Accounts Receivable
Aging Schedule

What entry
would Wilson
make assuming
that no balance
existed in the
allowance
account?

Bad Debt Expense 37,650

Allowance for Doubtful Accounts
37,650
7-8
 Uncollectible
Uncollectible Accounts
Accounts Receivable
Receivable
Illustration 7-9
Accounts Receivable
Aging Schedule

What entry
would Wilson
make assuming
the allowance
account had a
credit balance
of $800 before
adjustment?

Bad Debt Expense ($37,650 – $800) 36,850

Allowance for Doubtful Accounts
36,850
7-9
 Uncollectible
Uncollectible Accounts
Accounts Receivable
Receivable

Ex. (Recording Bad Debts): Sandel Company reports the

following financial information before adjustments.

Instructions: Prepare the journal entry to record bad debt

expense assuming Sandel Company estimates bad debts at
(a) 1% of net sales and (b) 5% of accounts receivable.

7-10
 Uncollectible
Uncollectible Accounts
Accounts Receivable
Receivable

Ex. (Recording Bad Debts): Sandel Company reports the

following financial information before adjustments.

Instructions: Prepare the journal entry to record bad debt

expense assuming Sandel Company estimates bad debts at
(a) 1% of net sales. (€800,000 – €50,000) x 1% = €7,500

Bad Debt Expense 7,500

Allowance for Doubtful Accounts
7,500
7-11
 Uncollectible
Uncollectible Accounts
Accounts Receivable
Receivable

E7-7 (Recording Bad Debts): Sandel Company reports the

following financial information before adjustments.

Instructions: Prepare the journal entry to record bad debt

expense assuming Sandel Company estimates bad debts at
(b) 5% of accounts receivable. (€160,000 x 5%) – €2,000) = €6,000

Bad Debt Expense 6,000

Allowance for Doubtful Accounts
6,000
7-12
 Recovery
Recovery of
of Uncollectible
Uncollectible Accounts
Accounts

Illustration: Assume that the financial vice president of Brown

Furniture authorizes a write-off of the $1,000 balance owed by
Randall Co. on March 1, 2012. The entry to record the write-off is:

Bad Debt Expense 1,000

Accounts Receivable
1,000
Assume that on July 1, Randall Co. pays the $1,000 amount that
Brown had written off on March 1. These are the entries:

Accounts Receivable 1,000

Allowance for Doubtful Accounts
1,000
Cash 1,000
7-13 Accounts Receivable LO 5
 Seatwork-
Seatwork- 11
Braces Company uses the allowance method of accounting for bad debts.
The following summary schedule was prepared from an aging of
accounts receivable outstanding on December 31 of the current year.
No. of days Outstanding Amount Estimated
uncollectible
0-30 days P500,000 2%
31- 60 days 200,000 10%
Over 60 days 100,000 20%

The following additional information is available for the current year:

Net credit sales for the year P4,000,000
Allowance for Doubtful Accounts:
Balance January 1 45,000
(credit)
Balance before adjustment, December 31 2,000 (debit)
a. If Braces basis its estimate of bad debts on the aging of accounts
receivable, doubtful accounts expense for the current year ending
December 31 is ____________________.
b. If Braces determines bad debt expense using 1.5 percent of net credit
sales, the net realizable value of accounts receivable on the December
31, balance sheet will be _______________________.
7-14
 Seatwork
Seatwork -- Answer
Answer
a. P52,000
b. P742,000

7-15