Bad Debts Allowance Method

In order to write off accounts receivable, there are two methods available. Here, we will be discussing the indirect method which is called bad debt allowance method. The management decides the allowance rate based over the past trends and uses this to create a allowance for the risk. This method is compatible with matching concept of accounting, that is why, it is allowed in US GAAP. The other method of writing off bad debt is not allowed in US GAAP. Practically, indirect method has widespread acceptance all over the world and assumed to be the best choice.

Journal Entry

  Debit Credit
Bad Debt Expense ABC  
       Allowance for doubtful debt   ABC

 

Writing Off Entry

When it gets confirmed that the customer is not going to pay its dues, we have to write off the accounts receivable by passing the following entry:

 

Debit Credit
Allowance for doubtful debt ABC  
         Accounts Receivable   ABC

 

Question

Z & Co is a well known entity in private sector that deals in the manufacturing of yard thread. From last two years, it is facing problems in working capital management. The General Manager of the company is too much concerned about the performance of the company due to poor recovery. As a result, it has requested your services to evaluate the receivable’s performance. The details of accounts receivable at Dec 31, 2014:

Transaction date

Clients

Amount receivable

January, 30

Shiz Store

10,000

July, 20

Badi & Co.

40,000

September, 15

Falcon Store

64,000

October, 27

Kame & Co.

18,000

November, 10

Suzan Sons

80,000

November, 12

Alice Sons

240,000

December, 10

Ari Sons

160,000

December, 28

Newton & Co.

120,000

 

Required

Construct a schedule for receivables by age group of 30 days, 2%; 31 – 60 days, 4%; 61 -120 days, 10%; and over 120 days, 20%.

Record t he journal entry for adjustment to bring out the allowance for doubtful accounts to its required balance at Dec 31, 2014. Before making any adjustment, the allowance for doubtful account has debit balance of $ 3,300.

Solution

Z & Co.

Accounts Receivable by Age Group

For the Period Ended December, 2014

Customer

Amount

1-30 days past due 2%

31-60 days past due 4%

61-120 days past due 10%

Over 120 days past due 20%

           

Shiz store

10,000

     

10,000

Badi & co.

40,000

     

40,000

Falcon store

64,000

   

64,000

 

Kame & co.

18,000

   

18,000

 

Suzan sons

80,000

 

80,000

   

Alice sons

240,000

 

240,000

   

Ari sons

160,000

160,000

     

 Newton & co.

120,000

120,000

     
   

280,000

320,000

82,000

50,000

Z & Co.

Allowance for Doubtful Debt

For the Period Ended December, 2014

Age group

Amount

Uncollectable rate

Uncollectable amount

1-30 days past due

280,000

2%

5,600

31-60 days past due

320,000

4%

12,800

61-120 days past due

82,000

10%

8,200

Over 120 days past due

50,000

20%

10,000

Total

732,000

 

36,600

 

Computation

Total uncollectable amount

36,600

Add: Allowance for bad debts debit balance

3,300

Adjusted balance

39,900

 

Z & Co.

Journal entries

Date

Particulars

Debit

Credit

 

Bad debts expense

Allowance for bad debts

(To record the estimated bad debts.)

39,900

39,900

 

Expense & Revenue Summary

Bad debts expense

(To close the bad debt expense account.)

39,900

39,900

 

Allowance for Doubtful Debt Calculation and Journal Entries

Zed Plc is a private limited company. It is in the business of home decoration for 10 years. On June 30, 2014, account receivable and allowance for doubtful debt of Zed Plc had the following balances:

Accounts receivable

400,000

Allowance for doubtful debt

12,000

 

Upon detailed analysis of the accounts receivable subsidiary ledger, it is found that one customer is having credit balance of $ 20,000.

During the year 2014, there are numerous transactions that took place as follows:

Zed Plc sell merchandise on credit terms amounting to $ 1,000,000. This amount includes sale to a customer who paid the advance payment of $ 20,000 in the year 2013.

Bad debts written off during the year 2014 $ 40,000.

Collection from customers amounting to $ 860,000 including an account receivable which was previously written off.

Zed Plc has a policy in place to provide a bad debt provision of 10 % per year on the ending balance of accounts receivable.

Required:

As a management accountant of Zed Plc, you are required to make all possible journal entries for the year 2013 and 2014.

Answer

Zed Plc

Journal Entries

Date

Particulars

Debit

Credit

31 Dec 2012

Accounts receivable

Advance from customer

(recording of customer credit balance.)

20,000

 

20,000

Adjusting Entries

Date

Particulars

Debit

Credit

31 Dec 2012

Bad debt expense

Allowance for bad debts

(recording of estimated bad debts of the company.)

30,000

 

30,000

31 Dec 2012

Expense & Revenue Summary

Bad debt expense

(closing of bad debt expense)

30,000

 

30,000

Zed Plc

For the Year 2014

Journal & Adjusting Entries

Date

Particulars

Debit

Credit

1

Accounts receivable

Advance form customer

Sales

(Sale of goods on credit)

980,000

20,000

 

 

1,000,000

2

Allowance for bad debts

Accounts receivable

(write off during the year)

40,000

 

40,000

3

Cash

Accounts receivable

(cash collected from the customer)

800,000

 

800,000

 

Accounts receivable

Allowance for bad debts

(to record the recovery of write off debt)

60,000

 

60,000

 

Cash

Accounts receivable

Cash received from the customer)

60,000

 

60,000

 

Allowance for bad debts

Retained earning

To adjust the allowance for bad debt account)

6,000

 

6,000

 

Computation

Accounts receivable (2013)

400,000

Add: customer credit amount

20,000

Total accounts receivable

420,000

Provision for doubtful rate

10%

Uncollectable amount (420,000 x 10%)

42,000

Less: allowance for bad debts credit amount

12,000

Adjusted balance

30,000

Accounts receivable 2014

560,000

Uncollectable rate/ provision rate

10%

Uncollectable amount

56,000

Less: allowance for bad debts credit amount

62,000

Adjusted balance

(6,000)

 

Accounts receivable

 

Debit

 

Credit

balance

420,000

2

40,000

1

980,000

3

800,000

3

60,000

3

60,000

   

balance

560,000

       
 

1,460,000

 

1,460,000

 

Allowance for doubtful debt

 

Debit

 

Credit

2

40,000

balance

42,000

balance

6,000

3

60,000

 

56,000

   
       
 

102,000

 

102,000

 

Question:

TAN traders are the leading trader for the sale and purchase of bikes. It has great reputation in the local market. The reason behind its success is due to neat and clean credit policy with no hidden clauses and charges. As a result, it has gained respect and trust in the local market.

However, as like other businesses, TAN suffers bad debts each year. These are the transactions and balances from the accounting records of TAN traders relevant with the customers:

Accounts receivable opening balance

550,000

Allowance for bad debts credit balance

5,500

 

During the year, following transactions were taken place:

Sales on credit $ 1,200,000

Sales discount given and availed by a customer $ 30,000.

Cash recovered from customers $ 950,000.

In order to account for estimate uncollectible accounts, TAN follows balance sheet approach @ 1 % of ending accounts receivable.

Required

You are required:

to record above transactions in general journal and record the adjusting entry.

Prepare accounts receivable and allowance for bad debt.

Prepare partial balance sheet.

 

Solution

TAN Traders

Journal Entries

Date

Particulars

Debit

Credit

1

Accounts receivable

Sales

(Goods sold to customers on credit terms.)

1,200,000

 

1,200,000

2

Sales discount

Accounts receivable

(discount availed by a customer.)

30,000

 

30,000

3

Cash

Accounts receivable

(Cash collected from customers.)

950,000

 

950,000

 

Computation

Accounts receivable

770,000

Allowance for doubtful debt rate

1 %

Uncollectable amount

7,700

Less: allowance for doubtful debt (credit balance)

5,500

Adjusted balance

2200

 

TAN Traders

Adjusting Entries

Date

Particulars

Debit

Credit

 

Bad debt expense

Allowance for bad debt

(recording of the estimated bad debt)

2,200

 

2,200

 

Expense & revenue summary

Bad debts expense

(closing of bad debt expense)

2,200

 

2,200

 

General Ledger

Accounts receivable

 

Debit

 

Credit

balance

550,000

2

30,000

1

1,200,000

3

950,000

   

Balance

770,000

       
 

1,750,000

 

1,750,000

 

Allowance for doubtful debt

 

Debit

 

Credit

   

balance

5,500

   

adjustment

2,200

       

balance

7,700

 

7,700

 

TAN Traders

Balance Sheet

As on Dec …..

Assets

Equities

Accounts receivable

770,000

     

Less: Allowance for bad debt

7,700

762,300

   
Contents
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