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Valuation of A/R

Q: 2 methods for uncollectible accounts

1.) Direct Write off Method: Not allowed under GAAP unless the amount uncollectible is immaterial 2.) Allowance Method: Acceptable under GAAP when material in amount.

Q: Direct Write-off method for Uncollectible Accounts

-Under this method, Bad Debt Expense will show only actual losses from uncollectibles. EX JE: DR Bad Debt Expense CR A/R

10 important questions on Valuation of A/R

A/R Valuation: Uncollectible Accounts

-An uncollectible A/R is a loss of revenue that requires proper entry in the accounts
-Decreases A/R, Income, and Stockholders Equity
-B/S, we report receivables on a "net" basis after AFDA, i.e., net amount expected to be collected

2 methods for uncollectible accounts

1.) Direct Write off Method: Not allowed under GAAP unless the amount uncollectible is immaterial
2.) Allowance Method: Acceptable under GAAP when material in amount.

Direct Write-off method for Uncollectible Accounts

-Under this method, Bad Debt Expense will show only actual losses from uncollectibles.
EX JE:
DR Bad Debt Expense
CR A/R

What makes the Direct Write-Off method Deficient?

1. Fails to record expenses in same period as associated revenues
2. Receivables are not stated at the net amount expected to be collected on the balance sheet.

Allowance Method for Uncollectible Accounts

-Estimates uncollectibles at end of each period
-This allows companies to state receivables on the B/S at net amount

Gross A/R - Estimated Uncollectible Accounts

3 essential features of Allowance Method

Companies estimate uncollectible amount compare new estimates to current in allowance account
DR Bad Debt expense, with increases in uncollectibles ||| CR AFDA, through adjusting entries at end of each period.
When writing off, DR actual uncollectibles to AFDA and CR A/R.

Allowance for Doubtful Accounts

-Estimated amount of A/R that company expects to be uncollectible in future.

Companies do not know which customers will not pay; therefore, they CR AFDA, contra A/R.
The CR balance in the Allowance account will absorb specific customer write-offs when occuring in future.

Step 1 of Allowance Method: Estimating Bad Debt Expense

1.) Identify AFDA ending Balance
2.) Adjusting JE: Adjust AFDA account to find missing value; missing value = Bad debt expense.
DR Bad Debt Expense
CR AFDA