ACCT 1005 _ Accounting For Receivables

Monies owed to business by other businesses or

individuals
These claims arise from:
Selling goods or services on account/credit
Lending money
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University of the West Indies, Mona 36

1. Amount due from customers for goods/services on account

2. Classified as a current asset on the Bs
3. Shown at Net Realizable Value
Types
of Receivables

1. Written Promise to receive cash

2. Current Asset or L-T Asset on the Bs (Maturity)

Trade Receivables – Notes & AR that result from sales

 OTHER RECEIVABLES - loans to employees & interest receivable
 May be Current or L-T
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University of the West Indies, Mona 37

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ACCT 1005 _ Accounting For Receivables

Uncollectible Accounts
Selling goods & services on account/credit create
 a benefit (more sales)
 a cost (some customers will not pay)
Uncollectible accounts give rise to an expense
referred to as
– Uncollectible-Account Expense
– Also referred to as Doubtful-Account Expense or
Bad-Debt Expense
 Considered a normal business expense
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University of the West Indies, Mona 38

1. Estimate BD Expense
2. Make Adjusting JE
Accounting Dr BD Expense; Cr Allowance For BDs
3. Write-Off Bad Debt (BD) when it is identified
For
Bad Debts Dr Allowance For BDs; Cr A/Cs Receivable
4. Consistent with the matching principle (GAAP)

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University of the West Indies, Mona 39

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ACCT 1005 _ Accounting For Receivables

Percentage of Sales Method

Also called the Income Statement Approach.

 It is based on prior experience of the business.
 It is computed as a percentage of sales on account
(credit sales).
Disregards existing balance in the Allowance
For Bad-Debts A/C.
The percentage used is adjusted as needed to reflect
collection experience.

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University of the West Indies, Mona 40

Aging of Accounts Receivable

Also called the Balance Sheet Approach
Individual accounts receivable from specific customers are
analyzed according to the length of time they have been
outstanding.
i.e. Computer sorts customers accounts by age
 Longer debt is O/S, the more likely it is that the customer will
not pay. (% increases with age of debt)
Estimated Uncollectible AR is determined by applying
percentages based on past experiences to each category
Balance on the Allowance For Bad Debts A/C is
taken into account
Bad-Debt Expense is the difference between the
required balance & the existing balance on
Allowance For Bad-Debts A/C
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University of the West Indies, Mona 41

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ACCT 1005 _ Accounting For Receivables

Bad-Debts Recovered
Collection of a previously written- off account
i) Reinstate Debtor
 Dr Accounts Receivable
Cr Allow. for Bad-Debts – reinstate/reverse w/off
 Dr Cash
Cr Accounts Receivable – record collection
The balance on Accounts Receivable does not change.

ii) Do Not Reinstate

Dr Cash
Cr Allow. For Bad Debts
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University of the West Indies, Mona 42

Direct Write-Off Method

Used by small, private companies
No allowance account is created
Matching concept is not adhered to
An account is written-off only when it becomes uncollectible
Dr Bad-Debt Expense
Cr Accounts Receivable
 Accounts Receivable will be shown at gross value in the BS (BS
is said to be overstated)
 Method permissible for tax purposes
 May be acceptable if business does mainly cash sales
 Accounts Receivable low
 Impact would be immaterial
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University of the West Indies, Mona 43

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