Accounts Receivable Flashcards
Gross method
Records receivables at gross invoices price before cash discount.
Net method
Records receivables at net invoice price after cash discount is taken.
Entry for cash received within discount period (Gross Method)
Cash
Sales discount
Accounts Receivable
Entry for sales discount forfeited (Net Method)
Cash
Sales discount forfeited
Accounts receivable
Entry for direct write-off method
bad debt expense
Accounts receivable
Direct write-off method
Recors bad debt expense only when a specific account receivable is considered uncollectible and is written off. It can be used only when the firm is unable to estimate uncollectible accounts receivable reliably. Most large firms do not use this method.
Allowance method
The allowance method is the method of choice for most large firms and is required under GAAP if uncollectible accounts are probable and estimable. This method records an estimate of bad debt expense at the end of each year in an adjusting entry. An allowance (contra receivable) is created at that time and reduces net accounts receivable.
Allowance method end of period entry
Bad debt expense
allowance for doubtful accounts
entry for write-off of uncollectible accounts
allowance for doubtful accounts
accounts receivable
entry for recovery of accounts previously written off
Accounts receivable
allowance for doubtful accounts
cash
accounts receivable
AR ending
AR beginning + sales -writeoffs - customer collections = AR Ending
Ending allowance balance
Beginning allowance balance + uncollectible accounts expense - write offs + recoveries = ending allowance balance
Aging method
The aging method computes a required ending allowance balance based on the aging schedule.
Describe the income statement approach for bad debts
Estimates bad debts as a percentage of credit sales.
Describe the balance sheet approach for calculating an allowance balance.
Applies a percentage to ending accounts receivable.
