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{1bb28fb76c3d282be6cfd0391ccf1d9529baae691cd895e2d45215811b51644c}; 31 – 60 days, 4{1bb28fb76c3d282be6cfd0391ccf1d9529baae691cd895e2d45215811b51644c}; 61 -120 days, 10{1bb28fb76c3d282be6cfd0391ccf1d9529baae691cd895e2d45215811b51644c}; and over 120 days, 20{1bb28fb76c3d282be6cfd0391ccf1d9529baae691cd895e2d45215811b51644c}.
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{1bb28fb76c3d282be6cfd0391ccf1d9529baae691cd895e2d45215811b51644c} | 31-60 days past due 4{1bb28fb76c3d282be6cfd0391ccf1d9529baae691cd895e2d45215811b51644c} | 61-120 days past due 10{1bb28fb76c3d282be6cfd0391ccf1d9529baae691cd895e2d45215811b51644c} | Over 120 days past due 20{1bb28fb76c3d282be6cfd0391ccf1d9529baae691cd895e2d45215811b51644c} |
| 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{1bb28fb76c3d282be6cfd0391ccf1d9529baae691cd895e2d45215811b51644c} | 5,600 |
| 31-60 days past due | 320,000 | 4{1bb28fb76c3d282be6cfd0391ccf1d9529baae691cd895e2d45215811b51644c} | 12,800 |
| 61-120 days past due | 82,000 | 10{1bb28fb76c3d282be6cfd0391ccf1d9529baae691cd895e2d45215811b51644c} | 8,200 |
| Over 120 days past due | 50,000 | 20{1bb28fb76c3d282be6cfd0391ccf1d9529baae691cd895e2d45215811b51644c} | 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 expenseAllowance for bad debts(To record the estimated bad debts.) | 39,900 | 39,900 | |
| Expense & Revenue SummaryBad 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 {1bb28fb76c3d282be6cfd0391ccf1d9529baae691cd895e2d45215811b51644c} 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 receivableAdvance from customer(recording of customer credit balance.) | 20,000 | 20,000 |
Adjusting Entries
| Date | Particulars | Debit | Credit |
| 31 Dec 2012 | Bad debt expenseAllowance for bad debts(recording of estimated bad debts of the company.) | 30,000 | 30,000 |
| 31 Dec 2012 | Expense & Revenue SummaryBad 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 receivableAdvance form customerSales(Sale of goods on credit) | 980,00020,000 | 1,000,000 |
| 2 | Allowance for bad debtsAccounts receivable(write off during the year) | 40,000 | 40,000 |
| 3 | CashAccounts receivable(cash collected from the customer) | 800,000 | 800,000 |
| Accounts receivableAllowance for bad debts(to record the recovery of write off debt) | 60,000 | 60,000 | |
| CashAccounts receivableCash received from the customer) | 60,000 | 60,000 | |
| Allowance for bad debtsRetained earningTo 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{1bb28fb76c3d282be6cfd0391ccf1d9529baae691cd895e2d45215811b51644c} |
| Uncollectable amount (420,000 x 10{1bb28fb76c3d282be6cfd0391ccf1d9529baae691cd895e2d45215811b51644c}) | 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{1bb28fb76c3d282be6cfd0391ccf1d9529baae691cd895e2d45215811b51644c} |
| 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 {1bb28fb76c3d282be6cfd0391ccf1d9529baae691cd895e2d45215811b51644c} 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 receivableSales(Goods sold to customers on credit terms.) | 1,200,000 | 1,200,000 |
| 2 | Sales discountAccounts receivable(discount availed by a customer.) | 30,000 | 30,000 |
| 3 | CashAccounts receivable(Cash collected from customers.) | 950,000 | 950,000 |
Computation
| Accounts receivable | 770,000 |
| Allowance for doubtful debt rate | 1 {1bb28fb76c3d282be6cfd0391ccf1d9529baae691cd895e2d45215811b51644c} |
| 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 expenseAllowance for bad debt(recording of the estimated bad debt) | 2,200 | 2,200 | |
| Expense & revenue summaryBad 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 |