Revised July 2008
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ACC101 – CHAPTER 7
Accounting for Receivables
Revised July 2008
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Key Terms and Concepts to Know
Result from sales on account (credit sales), not cash sales.
May also result from credit card sales if there is a delay between when sale is made and
when the cash is received from the credit card company.
Accounting for Uncollectible Accounts:
Not all sales on account result in cash being collected from the customer.
The Allowance Method debits bad debt expense in the period when the sale is
recorded and credits a contra-asset account, Allowance for Uncollectible Accounts. When
a specific account is determined to be uncollectible, the Allowance is debited and
Accounts Receivable is credited.
The Direct Write-off Method debits bad debt expense and credits Accounts
Receivable in the period when a specific account is determined to be uncollectible. The
Direct Write-off Method violates the matching principle because it does not match
revenues and expenses in the same period.
Determining the Amount of Uncollectible Receivables and Bad Debt Expense:
The Percent of Sales Method uses one income statement account, Sales, to estimate
the change in another income statement account, Bad Debt Expense, for the period.
This is the amount of the adjusting entry required. The balance in the Allowance
account is then the balance in the ledger before adjustment plus the adjusting entry for
bad debt expense.
The Percent of Receivables Method uses the balance in one balance sheet account,
Accounts Receivable, to estimate the balance in another balance sheet account,
Allowance for Uncollectible Accounts, at the end of the period. The adjusting entry for
bad debt expense is the difference between the balance in the ledger before adjustment
and the estimated balance in the allowance account.
Accounts Receivable on the Balance Sheet:
Allowance account is deducted from Accounts Receivable to determine Net Realizab