Understanding Receivables: Journal Entries and Methods for Bad

School: University of Maryland, Eastern Shore - Course: ACCT 202 - Subject: Accounting

CHAPTER 9 RECEIVABLES

ACCOUNTS RECEIVABLE • A COMPANY SELLS, ON CREDIT, MERCHANDISE INVENTORY FOR $1,000. THE COMPANY HAD PURCHASED THE ITEMS FOR $800. • WHAT WOULD BE THE JOURNAL ENTRIES TO RECORD THE TRANSACTION.

ACCOUNTS RECEIVABLE • ACCOUNTS RECEIVABLE1,000 • SALES1,000 • COST OF GOODS SOLD800 • MERCHANDISE INVENTORY800

ACCOUNTS RECEIVABLE • ACCOUNTS RECEIVABLE SUBSIDIARY LEDGER • LISTS ACTIVITY AND BALANCE BY CUSTOMER • MUST RECONCILE WITH THE GENERAL LEDGER BALANCE

BAD DEBTS • TWO METHODS FOR ACCOUNTING FOR BAD DEBTS • 1) ALLOWANCE METHOD • 2) DIRECT WRITE-OFF METHOD (NOT GAAP, BUT OK IF NOT MATERIAL DIFFERENCE FROM THE ALLOWANCE METHOD) • REGARDLESS OF WHICH METHOD IS USED IT DOES NOT AFFECT THE COMPANY'S RIGHT TO COLLECT THE ACCOUNTS RECEIVABLE. • WHY DO YOU THINK THE DIRECT WRITE-OFF METHOD IS NOT GAAP?

BAD DEBTS • BECAUSE THE BAD DEBT EXPENSE MAY NOT BE RECOGNIZED IN THE SAME YEAR AS THE UNDERLYING SALE THAT RESULTED IN THE BAD DEBT WRITE OFF.

BAD DEBTS • DIRECT WRITEOFF METHOD JOURNAL ENTRY: • DEBIT: BAD DEBT EXPENSE • CREDIT: ACCOUNTS RECEIVABLE • WHAT WOULD BE THE JOURNAL ENTRIES TO RECORD THE RECOVERY OF THE BAD DEBT?

BAD DEBTS • TO RECORD PAYMENT OF BAD DEBT PREVIOUSLY WRITTEN OFF: • DEBIT: ACCOUNTS RECEIVABLE • CREDIT: BAD DEBT EXPENSE • DEBIT: CASH • CREDIT: ACCOUNTS RECEIVABLE

BAD DEBTS • JOURNAL ENTRY TO RECORD THE ESTIMATED BAD DEBT EXPENSE: • DEBIT: BAD DEBT EXPENSE • CREDIT: ALLOWANCE FOR DOUBTFUL ACCOUNTS • WHAT TYPE OF ACCOUNT IS "ALLOWANCE FOR DOUBTFUL ACCOUNTS"?

BAD DEBTS • CONTRA ACCOUNT

BAD DEBTS • WHAT WOULD BE THE JOURNAL ENTRY TO RECORD THE WRITE OFF OF A SPECIFIC BAD DEBT WHEN USING THE ALLOWANCE METHOD?

BAD DEBTS • DEBIT: ALLOWANCE FOR DOUBTFUL ACCOUNTS • CREDIT: ACCOUNTS RECEIVABLE • NOTE THAT THE NET ACCOUNTS RECEIVABLE REMAINS THE SAME AND THE BAD DEBT EXPENSE IS ALSO NOT AFFECT