Question

GAAP requires receivables be reported on the balance sheet net of uncollectible amounts (bad debt). This means the allowance method must be used to record uncollectible accounts. The allowance method includes making an adjusting entry. Explain this procedure to a new accounting student. Address these topics: the two accounts used in the adjusting entry two methods of estimating the bad debt expense amount for the adjusting entry how each estimating method could result in a different amount of bad debt expense how a different amount of estimated bad debt expense would affect the income statement and the balance sheet numbers specific examples/numbers could be used to demonstrate the effect on the financial statements

Answer 1

The receivables do include the uncollectible amounts, which are normally called bad debts. To reduce the impact of uncollectible accounts in the future period, a provision has to be made in the current period towards the expected uncollectible. The provision is called “Allowance for Uncollectible accounts” under the Allowance method. There exists three methods of estimating the uncollectible accounts: (i)The percentage of Credit Sales, (ii) The percentage of Closing Collectible and (iii) Percentage of Age-wise due amounts under the Uncollectible accounts. The provision entry is made through following journal entry:

Date	Accounts Title	Debit $	Credit $
Dec 31	Bad Debt Expense	XXXXX
	Allowance for Uncollectible Accounts		XXXXX

Whenever the bad debts are confirmed in future which pertains current period, following journal entry is made to write-off the Account Receivables:

Date	Accounts Title	Debit $	Credit $
Dec 31	Allowance for Uncollectible Accounts	XXXXX
	Account Receivables		XXXXX

The bad debts got eliminated out of Allowance maintained towards Uncollectible Accounts and also out of Account Receivables.

The estimated bad debt expense always provides different amounts as judgment of uncollectible under “the percentage of credit sales and closing collectible” will provide less accurate to “the percentage of age-wise estimation of Uncollectible accounts”.

The wrong and huge difference in estimation of the Uncollectible amount will results in wrong provisions and could result in higher incomes, which ultimately results in higher or lower payment of dividend. The Allowance for Uncollectible accounts is presented in Balance Sheet as:

Assets:	Debit $
Current Assets:
Account Receivables	200000
Less: Allowance for Uncollectible Accounts	10000
Net Account Receivables	190000