Accounting chapter 9.1

Q: What is Bad Debt Expense?

A: Money a company cannot collect.

Q: Another name for Bad Debt Expense?

A: Uncollectible Accounts Expense.

Q: Why does bad debt happen?

A: Customers cannot pay.

Q: Is bad debt normal?

A: Yes.

Q: What type of risk is bad debt?

A: Risk of selling on credit.

Q: Example of bad debt increase?

A: Wells Fargo during 2008 crisis.

Q: What are the two bad debt methods?

A: Direct Write-Off and Allowance Method.

Q: When is Direct Write-Off used?

A: When account is known to be uncollectible.

Q: What does direct write off record?

A: Actual losses.

Q: When is expense recorded in write off?

A: Different period than revenue.

Q: Is Direct Write-Off GAAP acceptable?

A: No (if amounts are large).

Q: Journal entry for write-off?

A: Dr Bad Debt Expense / Cr Accounts Receivable.

Q: Example write-off amount?

A: $200 account written off.

Q: What does the Allowance Method do?

A: Estimates bad debts.

Q: Why is allowance method better?

A: Matches expense with revenue.

Q: What does allowance method ensure on balance sheet?

A: Net realizable value.

Q: What is net realizable value?

A: Amount expected to be collected.

Q: Is Allowance Method GAAP required?

A: Yes (if material).

Q: How do companies estimate bad debt?

A: Using past experience.

Q: Two estimation methods?

A: Percent-of-sales and Aging-of-accounts.

Q: What does Percent-of-Sales calculate?

A: Bad debt as % of credit sales.

Q: What statement does percent sales focus on?

A: Income statement.

Q: What does percent of sales emphasize?

A: Expense.

Q: When is percent sales recorded?

A: End of period adjusting entry.

Q: What does Aging-of-Accounts focus on?

A: Accounts receivable balance.

Q: How are accounts grouped?

A: By age.

Q: What happens to older accounts?

A: More likely uncollectible.

Q: What does this method adjust? Aging of accts

A: Allowance account balance.

Q: What is interest?

A: Cost of borrowing money.

Q: Interest formula?

A: Principal × Rate × Time.