- Receivables are claims against other entities that are usually settled in cash, including trade receivables from normal operations and non-trade receivables from other activities. - Accounts receivable must be adjusted on the balance sheet to reflect their net realizable value by creating an allowance for doubtful accounts to account for expected uncollectible amounts. - There are two main methods for accounting for uncollectible receivables - the direct write-off method and estimated bad debts method.

4. Receivables Accounting for Uncollectible Receivables (Direct Method) Write Off: Bad Debts Expense……………. 400 Accounts Receivable………. 400 To write off an uncollectible account. This entry is made when the account has been determined uncollectible. Since this determination was made after the period in which the sale takes place, the matching principle is violated

5. Receivables Accounting for Uncollectible Receivables (Estimated Bad Debts Method) Bad debts can be estimated based on sales or on accounts receivable.

7. Estimated Bad Debts Method Receivables In this method, an estimate of the total uncollectible accounts is made at the end of the period, and an expense is recognized. Bad Debts Expense………………….. 2,000 Allowance for Doubtful Accounts.. 2,000 To record estimated uncollectible accounts. When the account is then determined to be uncollectible, the write-off entry is: Allowance for Doubtful Accounts……... 400 Accounts Receivable…………………… 400 To write off an uncollectible account.

8. Recovery Of Previously Written-off Account Receivables Collection of an Accounts Receivable previously written off is evidence that the write off was an error; the receivable should therefore be reinstated as an asset. Accounts Receivable…… 400 Allowance for Doubtful Accounts….. 400 To reinstate as an asset an accounts receivable previously written off. A separate entry will be made in the cash receipt journal to record the collection. Cash……... 400 Accounts Receivable…………………… 400 To record receipt of a previously written off account.

9. Aging Of Accounts Receivable Receivables Bad Debts Expense………………….. 898 Allowance for Doubtful Accounts………. 898 To record estimated uncollectible accounts. 898 Total estimated Bad Debt Expense: 560 40 % 1,400 Above 90 days 60 15 % 400 61-90 days due 90 10 % 900 31-60 days due 80 5% 1,600 1-30 days due 108 3% 3,600 Not yet due Amount of Bad Debt % of Bad Debt Amount Age Group

10. Credit Balance In a Customer Account Receivables Abdul Hafeez Abdur Razzaq 5,000 1000 Accounts Receivable (Control Account) 4,000 (5,000-1,000)

13. Receivables Balance Sheet Approach: Allowances For Bad Debt 100 400 Bal 500 Income Statement Approach: Allowances For Bad Debt 100 500 Bal 600

14. Receivables Balance Sheet Approach: Income Statement Approach: Liabilities: Advance from customer 1,000 Current Assets: Accounts Receivable 5,000 Less: All. For bad debt (600) Net Realizable Value 4400 Equities Assets Equities Assets Liabilities: Advance from customer 1,000 Current Assets: Accounts Receivable 5,000 Less: All. For bad debt (500) Net Realizable Value 4500