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EFFECTS OF DIRECT WRITEOFF METHOD
THE ALLOWANCE METHOD

Allowance method
Required when bad debts are deemed to be material in amount
Uncollectible accounts are estimated At the end of each period Expense for the uncollectible accounts is
10
Review
a. b. c.
d.
Accounts receivable include Interest receivable. Advances to employees. Amounts customers owe from purchasing goods and/or services. Income taxes receivable.
9
RECOGNIZING ACCOUNTS RECEIVABLE
General Journal Date July 5 Account Titles Sales Returns and Allowances Accounts Receivable – Polo Company Debit 100 Credit
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DIRECT WRITE-OFF METHOD
Direct write-off method
An entry is made for bad debts expense when an account is determined to be uncollectible at which time the loss is charged to Bad Debts Expense
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Presentation of Allowance for Doubtful Accounts
THE ALLOWANCE METHOD
General Journal Date Mar. 1 Account Titles Allowance for Doubtful Accounts Accounts Receivable - R. A. Ware Debit 500 Credit
Recorded as Bad Debts Expense Considered a normal and necessary risk of doing business
Credit losses

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Bad Debts Expense...
Is an expense to record estimated uncollectible receivables.
3
Chapter 8 Reporting and Analyzing Receivables

Байду номын сангаас
Explain the statement presentation of receivables. Describe the principles of sound accounts receivable management. Identify ratios to analyze a company's receivables. Describe methods to accelerate the receipt of cash from receivables.
4
1
11
TYPES OF RECEIVABLES
Amounts due from individuals and other companies-expected to be collected in cash Three major classes of receivables



Accounts Receivable - amounts owed by customers on account, expected to be collected within 30-60 days Notes Receivable - claims for which formal instruments of credit are issued Other Receivables - non-trade receivables, for example, interest receivable and advances to employees
5
Receivables Differ Depending On...


Industry Time of year Whether the company extends long-term financing Credit policies
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Accounts Receivable...
a. b. c.
d.
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3
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ACCOUNTING FOR BAD DEBTS
Receivables are valued at the net amount expected to be received in cash

Excludes amounts that the company estimates it will not be able to collect (net realizable value)
Amounts owed by customers on account. Result from the sale of goods/services. Expected to be collected within 30-60 days. Most significant type of claim held by company. Often called trade receivables.
Bad Debts Expense 200 Accounts Receivable--M. E. Doran 200
Bad debt expense will show only actual losses. Accounts receivable will be reported at gross amount.
100
When a business receives returned merchandise previously When a customer on merchandise to a customer on credit, sold to a business sellscredit, Sales Returns and Allowances Accounts Receivable is Receivable is credited (decreased). is debited and Accountsdebited and Sales is credited.
Keeps expenses from being understated on the income statement and accounts receivables from being overstated on the balance sheet. 14
2 Methods for Accounting for Uncollectible Accounts


7
2
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ACCOUNTS RECEIVABLE
Two accounting issues associated with accounts receivable: Recognizing accounts receivable. Valuing accounts receivable.
8
RECOGNIZING ACCOUNTS RECEIVABLE
General Journal Date
July 1
Account Titles
Accounts Receivable – Polo Company Sales
Debit
1,000
Credit
1,000
When a business sells merchandise to a customer on credit, Accounts Receivable is debited (increased) and Sales is credited (increased).
THE ALLOWANCE METHOD
General Journal Date Account Titles Debit Credit
Dec. 31
Bad Debts Expense Allowance for Doubtful Accounts
12,000
12,000
Estimated uncollectibles are debited to Bad Debts Expense and credited to Allowance for Doubtful Accounts 备抵坏账 at the end of each period.
11
Review
Accounts receivable include Interest receivable. Advances to employees. Amounts customers owe from purchasing goods and/or services. Income taxes receivable.
Matched against sales in the same accounting period in which the sales occurred Results in Receivables being stated at cash (net) realizable value