AccountingAccount Receivable

Presentation

Accounting for Receivables• A receivable is a company’s claims for money, goods, or

services.

• An account receivable is classified as a current asset representing money due for services performed or merchandise sold on credit.

• When an account becomes uncollectible, a bad debt expense is incurred.

For Example:

Assume merchandise is sold on account for $1,000. The terms of the agreement were 2/10, n/30. The entries are as follows: Accounts Receivable 1,000 Sales Revenue 1,000

Uncollectible AccountsSome receivables will never be collected and must be written off as uncollectible.

Uncollectible Accounts Occurs:

• When customers do not pay for items or services purchased on credit.• Bad Debts are uncollectible accounts receivables.• The uncollectible expense is placed on the income

statement as a selling expense.

DEFINITION OF 'BAD DEBT'

• A debt that is not collectible and therefore worthless to the creditor. This occurs after all attempts are made to collect on the debt. Bad debt is usually a product of the debtor going into bankruptcy or where the additional cost of pursuing the debt is more than the amount the creditor could collect. This debt, once considered to be bad, will be written off by the company as an expense.

There is an upside and a downside to selling goods and services to customers on credit. The upside is that selling on credit encourages people to buy. For the most part, people pay their bills when they are due. The downside is that there will inevitably be customers who will either delay paying their bills or will never pay. The latter are referred to as Bad Debts.All businesses must investigate outstanding accounts receivable in order to identify and account for bad debts. This can be challenging because it is sometimes difficult to know whether the customer is late with the payment or is unable to pay. Assumptions must be made in this regard, because the records need to reflect the company’s current financial position as accurately as possible. Generally Accepted Accounting Principles (GAAP) provides two accounting methods for doubtful accounts and bad debts: the direct (write-off ) method and the allowance method.