Key Concepts
What is a Write-Off?
When a company removes an uncollectible account from accounts receivable.
When is bad debt recorded in this method?
When the account is confirmed uncollectible.
What is the allowance for doubtful accounts?
An estimate of uncollectible accounts.
Write the entry for direct write-off?
Dr Bad Debt Expense, Cr Accounts Receivable
A customer owes $500 but told you they are unable to pay. What happens?
The account is written off.
What is Net realizable value?
The amount a company expects to actually collect from A/R.
What account is debited when writing off an account?
Bad Debt Expense
What type of account is the allowance account?
Contra asset
Write an entry to estimate bad debts.
Dr Bad Debt Expense, Cr Allowance for Doubtful Accounts
A company estimates 5% of $10,000 sales will be uncollectible. How much is the bad debt expense?
$500
What is the formula for net realizable value?
A/R – Allowance for Doubtful Accounts
What account is credited when doing the direct write-off method?
Accounts Receivable
When is allowance for doubtful accounts recorded?
At the end of the period
Write the entry to write off an account (allowance method)
Dr Allowance for Doubtful Accounts, Cr Accounts Receivable
A company writes off $1,000 using the allowance method. What happens to A/R and allowance?
Both decrease by $1,000
Why don't companies expect to collect all of their A/R
some customers will not pay (bad debts).
Why does this method violate the matching principle?
Expense is recorded in a different period than the revenue.
Name the two estimation methods?
% of sales and aging of receivables
What happens to total assets when writing off an account?
No change
A company already wrote off an account, but the customer later pays. What must be done first?
Reinstate the account before recording cash
Why is net realizable value important for financial statements?
It ensures A/R is reported realistically and not overstated.
Give one disadvantage of this method.
Disadvantage: inaccurate financial reporting
Why is this method preferred over direct write-off?
It follows the matching principle and gives more accurate financial statements.
Write the entry of an Recovery (2 different entries)
1. Dr A/R, Cr Allowance
2. Dr Cash, Cr A/R
A company has:
At the end of the year, they estimate that the allowance should be $2,000.
Adjusting Entry
Current allowance = $1,200
Needed = $2,000
Adjustment = $800
Dr Bad Debt Expense 800
Cr Allowance for Doubtful Accounts 800
Step 2: Net Realizable Value
NRV = A/R – Allowance
= 15,000 – 2,000
= $13,000