Chapter 7

Front 1

Direct write-off method:

Back 1

accounting for bad debts records the loss from an uncollectible account receivable when it is determined to be uncollectable. No attempt is made to predict bad debts expenses. Credit bad debt expense, credit accounts receivable

Front 2

Recovering bad debt:

Back 2

debit AR, Credit BD Expense to reinstate account previously written off; then Debit Cash and Credit AR
Effects the 1) Matching Principle and 2) materiality constraints

Front 3

Matching principle

Back 3

record the expense during same accounting period as the sale they produced. Direct Write-off doesn’t meet that

Front 4

Materiality contraints

Back 4

states that an amount can be ignored if its effect on the financial statements is unimportant to users’ business decisions. It permits direct write-off method when bad debt expense are very small in relation to a company’s other financial statement items such as sales and net income

Front 5

Allowance Method:

Back 5

matches the estimated loss from uncollectible AR against the sales they helped produced. Has two advantages over direct write-off
• It fulfills matching principle –records expense in same period when they relate sale
• Reports AR on the balance sheet at the estimated amount of cash to be collected

Front 6

Recording BD expense with Allowance Method

Back 6

estimates BD expense at the end of accounting period and records it with an adjusting entry. Two Types: Percentage of Sales Method and Percentage of Receivables Method
Debit: Bad Debt Expense, Credit: Allowances for Doubtful accounts

Front 7

Allowances for Doubtful Accounts:

Back 7

is a contra assets account. A contra asset is used because company doesn’t want to decrease AR directly without knowing who will and will not pay. On balance sheet, Allowances for DA is subtracted from AR

Front 8

Write-Off w/ Allowance for DA:

Back 8

debit Allowances for DA, credit AR. It doesn’t affect total asset nor net income of specific account, those were affected in the period when the BD expense was predicted and recorded with an adjusting entry.

Front 9

Undo a Write-Off w/ Allowance of DA: Debit

Back 9

Debit AR, CR Allowances. Then Debit Cash, CR AR

Front 10

Realizable Value:

Back 10

refers to the expected proceeds from converting an asset into cash.

Front 11

Estimating BD- Percent of Sales Methods:

Back 11

An Accounts Allowance METHOD: Incomes statement method, is based on the idea that a given company’s credit sales for the period are uncollectable. (i.e. Company A has $400,000 credit sales, estimates that .6% are uncollectable. It expects $2,400 of bad credit (400,000 X .006), that 2400 is debited into BD Expense and Credited to Allowance for DA.

Front 12

Estimating BD –Percent of Receivables Method:

Back 12

An Accounts Allowance Method: Balance sheet method, uses balance sheet relations to estimate BD –mainly relations between AR and the allowance amount.
The estimated balance for the allowance account is obtained in one of two ways
1)Computing the percent uncollectible from the total accounts receivables
2)Aging Accounts Receivable

Front 13

Percent of Receivables Method (Estimation):

Back 13

Assumes that a given percentage of the company’s AR is uncollectible. Based on past experience and current economic trends and customer difficulties (ie. All Receivables X percent) For example, Company A has $50,000 AR at end of accounting period, estimates that 5% of AR is uncollectable, therefore Accounts for Doubtful Accounts after adjusting entry is posted is $2,500 (.05 X 50,000). We were told that beginning balance was $2,200 and AR of Dec 31 2008 was $44,000 therefore percentage of uncollectable receivables is 5%.

Front 14

Aging of Receivables Method:

Back 14

Aging of Receivables Method:

Front 15

Promissory note:

Back 15

written promise to pay a specific amount of money, usually with interest, either on demand or at a definite future date. Principal of a note: amount of money, Maturity date of a Note: day the note is due

Front 16

Notes Receivable as Extension on AR with partial payment

Back 16

Debit Cash with Partial payment, Debit NR rest, Credit AR

Front 17

Record Dishonored Note Receivable:

Back 17

balance of Notes Receivable account should include only those notes that have not matured. Note must be removed from NR and Charge to an AR from its maker. Debit AR, CR Interest Revenue, CR NR

Front 18

End-of-Period Adjusting Entry --Interest Receivable and Interest Revenue:

Back 18

end of Dec. 31, Debit Interest Receivable (balance sheet) and CR Interest Revenue (income statement). When end of note comes you Debit Cash, Credit the Interest Revenue collected since End of AP, Credit the Interest Receivable from before end of AP, then Credit NR.

Front 19

Disposing/Converting of Receivables:

Back 19

Can either 1) Sell Receivable or 2) use them as security/collateral for a loan

Front 20

Selling Receivables:

Back 20

Company can sell all or part of Receivables. Transfers risk of bad debt to factor and therefore there is a factoring fee. Debit Cash, Debit Factoring Fee Expense, Credit AR

Front 21

Pledging Receivables:

Back 21

Not factoring fee or transfer of risk. If borrow defaults on loan the lender has a right to be paid from the cash receipts of the receivables when collected. If company borrows money and pledges receivables then Debit Cash, Credit NP