Accounting for Receivables: Types, Recording, and Bad Debt

School: University of Ottawa - Course: ADM 1340 - Subject: Accounting

LEARNING OBJECTIVES SUMMARIZED: Identify the types of receivables and record accounts receivable transactions. Receivables can include accounts receivable, notes receivable, and other types of Accounts and notes resulting from sales transactions are called trade receivables. include nontrade receivables such as interest receivable, loans to company officer employees, sales tax recoverable, and income tax receivable. ○Accounts receivable arising from sales or services on credit are recorded at the inv reduced by any sales returns and allowances. The accounts receivable subsidiary l keep track of the account balances of each customer. Accounts Receivable is a con meaning it controls the accounts receivable subsidiary ledger. Any entry to the con also be made in the subsidiary ledger, and any entry in the subsidiary ledger must the control account. Normally a single entry is made to the control account for the entries made to the individual customer accounts in the subsidiary ledger. It is ess of the customer account information in the subsidiary ledger equal the balance in account. ○ When interest is charged on a past-due receivable, interest is added to the Accoun balance and is realized as interest revenue. ○ 1.Account for bad debts. The allowance method, using a percentage of receivables, is used to ensure that th of accounts receivable reflects management's best estimate of the amount that w collected. It also results in bad debts expense being recorded in the same period w from the related credit sales was earned. ○Because the specific customer accounts that will become uncollectible are not kno bad debt estimate is made, no entry can be made to Accounts Receivable because possible to make an entry to the subsidiary ledger. Instead, Allowance for Doubtfu contra asset account, is used to record the estimated uncollectible receivables. ○ A percentage of total receivables, or an aging schedule applying percentages to di groupings of receivables, is used to estimate the uncollectible accounts (which is a balance in Allowance for Doubtful Accounts). When a specific account receivable i uncollectible, it is written off and the allowance account reduced. When an accoun previously been written off is collected, the write off is reversed and then the colle○2.Chapter 8 Tuesday, March 21, 202312:25 PM

be made to Accounts Receivable because it would not be possible to make an entry to the subsidiary ledger. Instead, Allowance for Doubtful Accounts, a contra asset account, is used to record the estimated uncollectible receivables. A percentage of total receivables, or an aging schedule applying percentages to different age groupings of receivables, is used to estimate the uncollectible accounts (which is also the ending balance in Allowance for Doubtful Accounts). When a specific account receivable is determined to be uncollectible, it is written off and the allowance account reduced. When an account that has previously been written off is collected, the write off is reversed and then the collection is recorded. Bad debts expense is the difference between the estimated total uncollectible accounts (required balance in the allowance account) and the unadjusted balance in the allowance account.