Accounts Receivable & Doubtful Accounts

Accounts Receivable

  • \text{Beg. AR}+\text{Credit Sales}-\text{Collections}-\text{Sales Rtn/Disc}-\text{Write-offs}+\text{Recoveries}=\text{End. AR}
  • FOB Destination: seller bears freight. If carrier collects from buyer (freight-collect), seller records Delivery Expense and Payable/Refund to buyer (not added to AR).

Allowance for Doubtful Accounts (ADA)

  • Contra-asset reported with AR (net realizable value).
  • \text{Beg. ADA}+\text{Bad Debt Exp}-\text{Write-offs}+\text{Recoveries}=\text{End. ADA}
  • Write-off: Dr ADA / Cr AR (no I/S effect).
  • Recovery: Dr AR / Cr ADA then Dr Cash / Cr AR (restores account).

Estimating Doubtful Accounts

1. Percentage of Sales (Income-Statement focus)

  • \text{Bad Debt Exp}=\text{Credit Sales} \times \text{Bad-Debt %}
  • Adjustment ignores existing ADA balance (ADA is a by-product).

2. Percentage of Receivables (Balance-Sheet focus)

  • \text{Required ADA}=\text{End. AR} \times \text{Uncollectible %}
  • \text{Bad Debt Exp}=\text{Required ADA}-\text{Existing ADA (after write-offs)}
  • Historical rate derivation: \text{Rate}=\dfrac{\text{Write-offs}-\text{Recoveries}}{\text{Net Credit Sales}} (use multi-year averages).

3. Aging of Receivables

  • Stratify AR by days outstanding.
  • \text{Required ADA}=\sum (\text{Bucket AR} \times \text{% Uncollectible})
  • Compute Bad Debt Expense using same adjustment rule as %-of-Receivables.

Journal Entries (year-end)

  1. Record bad debts (any method):
    • Dr Bad Debt Expense
    • Cr Allowance for Doubtful Accounts
  2. Write-off specific account:
    • Dr Allowance for Doubtful Accounts
    • Cr Accounts Receivable
  3. Recovery of previously written-off account:
    • Dr Accounts Receivable / Cr Allowance for Doubtful Accounts
    • Dr Cash / Cr Accounts Receivable

Quick Tips

  • Percentage of Sales emphasizes matching; expense closed to I/S.
  • Percentage/Aging of Receivables emphasizes valuation; ensure ADA equals required ending balance.
  • Write-offs & recoveries affect ADA, never the income statement.
  • Shipping terms: FOB Shipping Point → buyer pays freight; FOB Destination → seller pays freight (delivery expense). Freight-collect at destination creates liability for seller, not receivable.