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13-2
Account receivableAccount receivable
Sales on credit to customers
Account receivable
Accounts owned to the company
13-3
Account receivableAccount receivable
Cred
it sales
Collection
The balance of Accounts receivable account
Increase
Decrease
13-4
Account receivableAccount receivable
Suppose the sale is made for cash…
The entry?
Cash 1,000
Revenues from Sales 1,000
13-5
Account receivableAccount receivable
Suppose the sale is made on credit…
The entry?
Accounts Receivable 1,000
Revenues from Sales 1,000
13-6
Account receivableAccount receivable
When the debt is
collected …
The entry?
Cash 1,000
Account receivable 1,000
13-7
Uncollectible accounts Uncollectible accounts oror bad debts bad debts
The accounts that can’t be collected are called uncollectible accounts or bad debts.
13-8
Uncollectible accounts Uncollectible accounts
Under the matching rule, expenses should be matched against with the sales.
The uncollectible accounts are incurred in the process of making sales revenues, and they should be recorded as the expenses of the same period of sales.
13-9
Uncollectible accountsUncollectible accounts
Now, let’s look at an example for George Ross Company
13-10
Uncollectible accountsUncollectible accounts Example Example
Suppose that George Ross Company has $6,000 of accounts receivable for the whole year.
At the end of the year, accountants estimate that about $200 of the $6,000 of accounts to be uncollectible.
In the next year, the bad debt actually occurs.Thus the uncollectible accounts expense for this year will be $6,000.
13-11
Uncollectible accountsUncollectible accounts Example Example
Dec. 31 Uncollectible Accounts Expense $200
Allowance for Uncollectible Accounts $200
When bad debts actually occurred
Allowance for Uncollectible Accounts $200
Accounts Receivable $200
13-12
Methods used in Methods used in estimating the allowanceestimating the allowance
1. Percentage of credit sales method
2. Accounts receivable aging method
3. Percentage of receivables method
13-13
Percentage of credit sales method
Meth
od 1
Percentage of credit sales Percentage of credit sales methodmethod
13-14
Percentage of credit sales Percentage of credit sales methodmethod
Percentage is estimated based on actual uncollectible accounts from prior years’ credit sales.
A percentage of credit sales for the year are assumed to be uncollectible.
13-15
Percentage of credit sales Percentage of credit sales methodmethod
Company's experience
Ultimate uncollectible accounts average:2% of credit sales
Indicate
Expensed 2%
of the receivables
with an offsetting
credit to the reserve
for bad-debt
At year-end: Adjusting entry
13-16
Percentage of credit sales Percentage of credit sales methodmethod
What is the effect of this adjusting entry?
Decrease inNet Income
Decrease in netAccounts Receivable
13-17
Percentage of credit sales Percentage of credit sales methodmethod
Formula
Estimated percentage of uncollectible accounts
= (estimated uncollectible accounts/estimated credit sales) * 100%
13-18
Percentage of credit sales Percentage of credit sales method method ExampleExample
Now, let’s look at an example …
Orient Construction Materials Company had total credit sales of $6,000,000 during 2006. In the past, the percentage of bad debts is 2.5%.
13-19
Percentage of credit sales Percentage of credit sales method method ExampleExample
The journal entry on December 31 ?
December 31 Uncollectible Accounts Expense $150,000
Allowance for Uncollectible Accounts $150,000
13-20
Meth
od 2
AAccounts receivable aging ccounts receivable aging methomethodd
The Aging of Receivables method
13-21
AAccounts receivable aging ccounts receivable aging methomethodd
The longer a receivable is outstanding, the less likely it is to be collected.
The Aging of Receivables method considers the age and amount of the ending Accounts Receivable balance.
13-22
AAccounts receivable aging ccounts receivable aging methomethodd
The estimated uncollectible Amounts in each category are totaled to determine the total allowance.
Individual accounts receivable from specific customers are analyzed according to the length of time they remain outstanding.
13-23
AAccounts receivable aging ccounts receivable aging methomethod d ExampleExample
Now, let’s look at an example for Orient Company …
Suppose that Orient Company had $600,000 of accounts receivable during 2006: A--$100,000; B-- $150,000; C--$200,000; D-- $150,000.
13-24
AAccounts receivable aging ccounts receivable aging methomethod d ExampleExample
Orient Company Analysis of Accounts Receivable by Age December 31, 2006
Item Account
Balance
Not yet due
Past due
0-30days 31-60days 61-120days
Over 120days
A $100,000 $50,000
B $150,000 $100,000 $50,000
C $200,000 $50,000 $50,000 $50,000 $50,000
D $150,000 $50,000 $100,000
Total $600,000 $200,000 $150,000 $50,000 $50,000 $100,000
Uncollectibility percentage 1% 3% 5% 6% 20%
Estimated $32,000 $2,000 $4,500 $2,500 $3,000 $20,000
13-25
AAccounts receivable aging ccounts receivable aging methomethod d ExampleExample
The journal entry on December 31 ?
December 31 Uncollectible Accounts Expense $32,000
Allowance for Uncollectible Accounts $32,000
13-26
PPercentage of receivables ercentage of receivables methodmethod
Meth
od
Percentage of receivables method
3
13-27
PPercentage of receivables ercentage of receivables methodmethod
Focus: determining the desired balance in the Allowance for Uncollectible Accounts on theBalance Sheet
This method uses a percentage of the ending accounts receivable balance to estimate the allowance for uncollectible accounts.
13-28
PPercentage of receivables ercentage of receivables methodmethod
Year-End Accounts Receivable x Bad Debt %
Compute the estimate of the Allowance for Doubtful Accounts
13-29
Compute the estimate of the Allowance for doubtful Accounts
PPercentage of receivables ercentage of receivables methodmethod
13-30
PPercentage of receivables ercentage of receivables method method ExampleExample
Now, let’s look at an example for Orient Co.
13-31
PPercentage of receivables ercentage of receivables method method ExampleExample
At the end of 2006, Orient Co.’s accounts receivable are $600,000 and the allowance account had a credit balance of $2,000.
In the past, Orient’s percentage of uncollectible accounts is 2%.
13-32
PPercentage of receivables ercentage of receivables method method ExampleExample
The journal entry on December 31 ?
December 31 Uncollectible Accounts Expense $10,000
Allowance for Uncollectible Accounts $10,000