ACCT 201 1st Edition Lecture 20 Outline of Last Lecture I Inventory assumptions continued Outline of Current Lecture II III Recording Bad Debt Expense Recording a Write of Current Lecture The seller records their losses that result from extending credit as Bad Debt Expense Such losses are a normal and necessary risk of doing business on a credit basis The allowance method of accounting for bad debts involves estimating uncollectible accounts at the end of each period This provides better matching of expenses with revenues on the income statement It also ensures that receivables are stated at their cash net realizable value on the balance sheet Cash net realizable value is the net amount a company expects to receive in cash from receivables It excludes amounts that the company estimates it will not collect Companies must use the allowance method for financial reporting purposes when bad debts are material in amount It has three essential features 1 Companies estimate uncollectible accounts receivable and match them against revenues in the same accounting period in which the revenues are recorded 2 Companies record estimated uncollectibles as an increase a debit to Bad Debt Expense and an increase a credit to Allowance for Doubtful Accounts through an adjusting entry at the end of each period Allowance for Doubtful Accounts is a contra account to Accounts Receivable 3 Companies debit actual uncollectibles to Allowance for Doubtful Accounts and credit them to Accounts Receivable at the time the specific amount is written of as uncollectible Under the direct write off method when a company determines receivables from a particular company to be uncollectible it charges the loss to Bad Debt Expense Under this method bad These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute debt expense will show only actual losses from uncollectibles The company reports accounts receivable at its gross amount without any adjustment for estimated losses for bad debts What we did in class Balance Sheet Asset Cash A R 10 000 Less Allowances 5 000 contra asset For uncollected account A R net 5 000 actual assumed to receivables Book 8 1 Accounts Rec 310 000 07 7 Bad debt estimate 21 700 assuming will not be collected 5 700 in Allowance for doubtful accounts 16 000 adj A L 16000 allow Bad Debt Exp 6 000 Allow 16 000 Asset Cash A R 310 000 Less Allow 21 700 A R net 298 300 SE 16000 bad debt expense Allow 5700 16 000 Bal 21 700 Collect 1000 owed by customer K A L SE 1000 cash 1000 A R collection Write of when you re not getting paid A R 309 000 1000 A R Less Allow 20 700 1000 Allow A R net 298 300 Net is unchanged because you already accounted for not getting it