Chapter 8 - Bad Debt Expense

Ch. 8 - 13 are the most important

Advantages and disadvantages of extending credit

Advantage: increases the seller’s revenues by helping customers buy products/services
Disadvantage: increase wage costs, bad debt costs, delays receipt of cash

Bad debts -

result from credit customers who will not pay the amount they owe, regardless of collection efforts

Allowance method -

Record an estimate of the bad debt expense with an adjusting entry at the end of the accounting period.

Journal entry for estimate of bad debts

DR bad debt expense, CR allowance for doubtful accounts

Journal entry for actual bad debt write off

DR allowance for doubtful accounts, CR accounts receivable

What financial statement is allowance for doubtful accounts recorded on?

It’s a subtraction from accounts receivable on the balance sheet

What financial statement is bad debt expense recorded on?

Income statement

What accounts to write offs effect?

The Estimate doesn’t affect accounts receivable, but write-offs do.

Net realizable value of the company’s accounts receivable by end of the month:"

accounts receivable - allowance for doubtful accounts = accounts receivable net

What type of account is the allowance for doubtful accounts?

contra asset

Percentage of credit sales method of estimating bad debts

Multiply historical percentage of bad debt losses by the current period’s credit sales = bad debt expense

Aging of accounts receivable method of estimating bad debts

Age the accounts receivable and allocate a percentage estimated uncollectible for each age range. Compute and add up each different category of estimated uncollectible.

Ending balance of allowance for doubt - beginning balance of allowance for doubt = Allowance for doubtful accounts

Account recoveries -

collection of a previously written off account: put the receivables back by reversing the write off, tjhen record the collection of the accounts receivable.

Direct write off method -

NOT acceptable, it reports sales when they occur and bad debt expense when it’s discovered.

Credit Terms

When companies sell on account, they specify the length of credit period (and any cash discounts for prompt payment). Compare the days to collect to the length of the credit period, to see if customers comply with the policy.

Factoring Receivables

To speed up collection, sell outstanding accounts receivables to another company (factor). Your company receives cash for the receivables minus the factoring fee.

Credit Card Sales

To avoid lengthy collection periods, allow customers to pay for goods using PayPal or national credit cards to speed up seller’s cash collection, and reduce loss from bad checks. Fee is charged for these services.

Leverage Data Analytics and Visualizations

Managers can monitor using data analytic tools, visualizing customer profitability to days to collect.

Notes Receivable

Promissory note to document its right to collect money from another party. They charge interest the day they’re created to the maturity date. Interest revenue is earned when loaning money.