�OVERVIEW OF ACCOUNTS RECEIVABLE�COLUMBIA CORE ACCOUNTING�REVIEW SESSION��ANTHONY LE�
WHAT ARE ACCOUNTS RECEIVABLES?
ACCOUNTS RECEIVABLE TRANSACTIONS
(1) Transfer Goods
+ $900 in credit
Company A
Customer B
Initial Transaction (January 1, 2018)
Journal Entry:
Dr Accounts Receivable 900
Cr Sales 900
ACCOUNTS RECEIVABLE TRANSACTIONS
Company A
Customer B
Estimating Bad Debts (December 31, 2018)
Assume that Company A had no accounts receivable prior to this year and that by the end of the year, they are estimating that 30% of the $900 (credit) sales will not be collectible.
�Journal Entry:
Dr Bad Debt Expense (30% * 900) 270
Cr Allowance for Doubtful Accounts 270
ACCOUNTS RECEIVABLE TRANSACTIONS
Company A
Customer B
Customer B Pays a Portion (December 31, 2018)
Assume that at the end of the year, Customer B also pays Company A $550 back.
�Journal Entry:
Dr Cash 650
Cr Accounts Receivable 650
$650
A/R ACCOUNTS OVER THE YEARS
Credit Sales
Bad Debt
Estimation
Collections
End (Total)
Cash Accounts Receivable Allowance for Doubtful Account Retained Earnings (Revenue/Bad Debt Expense)
+900
Assets Equity
+900
-270
-270
+250
-270
+630
+650
-650
+650
ACCOUNTS RECEIVABLE TRANSACTIONS
Company A
Customer B
Write-off (December 31, 2019)
Assume that in 2019, Customer B goes bankrupt and can no longer pay company A the remainder of what they owe (i.e., the 250).
�Journal Entry:
Dr Allowance for Doubtful Accounts 250
Cr Accounts Receivable 250
A/R ACCOUNTS OVER THE YEARS
Credit Sales
Bad Debt
Estimation
Collections
Write-Off
End (Total)
Cash Accounts Receivable Allowance for Doubtful Account Retained Earnings (Revenue/Bad Debt Expense)
+900
Assets Equity
+900
-270
-270
+0
-20
+630
+650
-650
+650
2018
2019
-250
+250
ACCOUNTS RECEIVABLE TRANSACTIONS
Company A
Customer B
Reversal of Write-off (December 31, 2020)
In 2020, we find out that Customer B is somehow able to pay Company back $100 of what it had owed!
�Journal Entry:
Dr Accounts Receivable 100
Cr Allowance for Doubtful Accounts 100
Dr Cash 100
Cr Accounts Receivable 100
$100
A/R ACCOUNTS OVER THE YEARS
Credit Sales
Bad Debt
Estimation
Collections
Write-Off
Reversal of
Write off
End (Total)
Cash Accounts Receivable Allowance for Doubtful Account Retained Earnings (Revenue/Bad Debt Expense)
+900
Assets Equity
+900
-270
-270
+0
-120
+630
+650
-650
+750
2018
2019
-250
+250
2020
+100
- 100
-100
+100
ESTIMATING BAD DEBT EXPENSE
11
THE BALANCE SHEET METHOD
Days | Percentage of 2021 A/R Collectible | Amount of A/R |
0-30 Days | 95% | 4,000,000 |
31 – 60 Days | 80% | 2,000,000 |
61 – 90 Days | 75% | 3,000,000 |
91 – 120 Days | 50% | 1,000,000 |
The idea behind the ”balance-sheet” method is to use a percentage of accounts that are uncollectible. It is called the “balance sheet” method because it relies on the following relationship:
Ending Allowance for Doubtful Accounts = Beginning Allowance for Doubtful Accounts + Bad Debt Expense – Write-Offs
Usually, the question is asking us to solve for the Bad Debt Expense for that year. That means they usually give us the other three pieces in some way.
THE BALANCE SHEET METHOD
Days | Percentage of 2021 A/R Collectible | Amount of A/R |
0-30 Days | 95% | 4,000,000 |
31 – 60 Days | 80% | 2,000,000 |
61 – 90 Days | 75% | 3,000,000 |
91 – 120 Days | 50% | 1,000,000 |
Say that this company has $10,000,000 in (gross) accounts receivable in 2021.* They started the year (i.e., the 2020 ending balance) with $1,000,000 in allowance for doubtful accounts and had write-offs of $500,000. What is the Bad Debt Expense?
What do we know with this information?
Ending Allowance for Doubtful Accounts = Beginning Allowance for Doubtful Accounts + Bad Debt Expense – Write-Offs
We can’t get at Bad Debt Expense if we don’t know the ending allowance for doubtful accounts!
*Note: We refer to Gross Accounts Receivable as just the raw amount of A/R, while Net Accounts Receivable are the Gross Accounts Receivables – Allowance for Doubtful Accounts
Hint: we’ll solve for the ending balance of allowance for doubtful accounts using this
THE BALANCE SHEET METHOD
Days | Percentage of 2021 A/R Collectible | Amount of A/R | Percentage of 2021 A/R Uncollectible |
0-30 Days | 95% | 4,000,000 | 5% |
31 – 60 Days | 80% | 2,000,000 | 20% |
61 – 90 Days | 75% | 3,000,000 | 25% |
91 – 120 Days | 50% | 1,000,000 | 50% |
This table tells us the percentage of our current accounts receivable that are collectible (and similarly, the portion that are uncollectible). Thus, once we figure out how much of our A/R are uncollectible, we’ll have Ending Allowance for Doubtful Accounts.
Therefore, the ending 2021 amount of A/R allowance for doubtful accounts should be:
Ending Allowance of Doubtful Accounts = (0.05)*4,000,000 + (0.2)*2,000,000 + (0.25)*3,000,000 + (0.5)*1,000,000 = $1,850,000
THE BALANCE SHEET METHOD
Days | Percentage of 2021 A/R Collectible | Amount of A/R |
0-30 Days | 95% | 4,000,000 |
31 – 60 Days | 80% | 2,000,000 |
61 – 90 Days | 75% | 3,000,000 |
91 – 120 Days | 50% | 1,000,000 |
What do we know now?!
Ending Allowance for Doubtful Accounts = Beginning Allowance for Doubtful Accounts + Bad Debt Expense – Write-Offs
We can now sole for 2021 Bad Debt Expense:
2021 Bad Debt Expense = 1,850,000 – 1,000,000 + 500,000 = $1,350,000
THE BALANCE SHEET METHOD
Days | Percentage of 2021 A/R Collectible | Amount of A/R |
0-30 Days | 95% | 4,000,000 |
31 – 60 Days | 80% | 2,000,000 |
61 – 90 Days | 75% | 3,000,000 |
91 – 120 Days | 50% | 1,000,000 |
Lastly, to record in journal entries:
To Record BDE:
Dr Bad Debt Expense 1,350,000
Cr Allowance for Doubtful Accounts 1,350,000
To Record Write-Off:
Dr Allowance for Doubtful Accounts 500,000
Cr Accounts Receivable 500,000
THE INCOME STATEMENT METHOD
The company’s 2021 credit sales were $3,000,000. The company estimates that the percentage of credit sales that won’t be collected is 15%.
In these questions, you directly estimate bad debt expense (in contrast to the “Balance Sheet” method where we estimate the Allowance for Doubtful Accounts first):
Bad Debt Expense = (0.15)*3,000,000 = $450,000
To record in journal entries:
To Record BDE:
Dr Bad Debt Expense 450,000
Cr Allowance for Doubtful Accounts 450,000
To Record Write-Off:
Dr Allowance for Doubtful Accounts 500,000
Cr Accounts Receivable 500,000