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WVU ACCT 201 - Uncollectible Revenue
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ACCT 201 1st Edition Lecture 20Outline of Last Lecture I. Inventory assumptions continuedOutline of Current LectureII. Recording Bad Debt ExpenseIII. Recording a Write-ofCurrent 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 revenuesin 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 entryat 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 SheetAssetCash ______A/R 10,000 Less: Allowances (5,000)  contra assetFor uncollected accountA/R (net) 5,000  actual $ assumed to receivablesBook 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 + SE Allow-16000 allow -16000 bad debt expense 5700 16,000Bad Debt Exp. !6,000 Bal. 21,700Allow. 16,000AssetCash _____ Collect $1000 owed by customer K.A/R 310,000 A = L + SE Less: Allow (21,700) +1000 cashA/R (net) 298,300 -1000 A/R  collectionWrite-of—when you’re not getting paidA/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


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