Summary
If we need to write off a receivable, we need to lower the asset (A/R) and the Revenue recorded when the credit sale was originally made (by recording Bad Debt Expense). We do not want to overstate assets or revenue (Principle of Conservatism).
Under the Direct Write-off method we wait until we know who is not going to pass us to do the write-off:
Bad Debt Expense
A/R - ABC Company
write-off ABC Company's account as uncollectible
(this will violate the matching principle if the write-off occurs in a different accounting period as the original credit sale and should only be used by company's with few credit sales)
Under the Allowance method, we make an estimate of how much of this year's credit sales will be uncollectible (without affecting a specific customer's account) using either the Percentage of Sales method or the Aging of A/R method.
- Adjusting Entry at year-end:
Bad Debt Expense
Allowance for Uncollecible Accounts
estimate current year's uncollectible accounts
- Write-off of specific account after estimating the Allowance:
Allowance for Uncollectible Accounts
A/R - XYZ Company
write-off XYZ Company's account as uncollectible
- Direct Write-off Problems
- page 403 Exercise 1
- page 407 Discussion Question 2
- page 407 BE 8-1
- page 409 EX 8-3
- Allowance Problems
- page 403 Exercise 2 and 3
- page 407 Discussion Question 3
- page 407 BE 8-2
- page 408 BE 8-3
- page 409 EX 8-4
- pg 411 Exercises 8-13 & 8-14
Watch this video if you need to review the main topics again
- Percentage of Sales Problems
- page 388 Check-up Corner 8-1
- page 403 Exercise 3
- page 408 BE 8-3
- page 409 EX 8-6 A and C
- Analysis (Aging) of A/R Problems
- page 391 Check-up Corner 8-2
- page 403 Exercise 4
- page 408 BE 8-4
- page 409 EX 8-6 B and D
- page 410 EX 8-8, 8-9, 8-10, 8-11, 8-12
- Review Problems
- page 411 EX 8-13, 8-14
- page 412 EX 8-17
- page 413 EX 8-18
