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Accounts receivable
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Accounts
receivables represent the amounts to be collected from the customers
who purchased the company's products on credit.
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Trade discounts
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An example
Volume discount: Discount based on the sale volume
Price is $20 per
unit
Price is $19 per
unit for the purchases of more than 100 units
$1 per unit is
volume discount
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Cash discounts
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Seller can offer to
provide cash discounts for the amount paid within a normal credit
period.
An example
Price is $60 per
unit for credit sales
If cash is paid at
the time of sale, buyers get 3% discount
Another example
Price is $60 per
unit
If buyers pay
within 10 days, they get 2% discount
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Terms of payment
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An example
2/10, net 30
2% discount for the
amount paid within 10 days
remaining amount is
due in 30 days
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Bad debts expense
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The amount of
accounts receivable that became uncollectible.
Two methods of recording bad debts expense
direct write off
method
Allowance method
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Direct write off
method
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Bad debts expense
is directly charged to accounts receivable as it becomes
uncollectible.
Journal entry example
(Debit)
Bad debts expense
5,000
(Credit)
Accounts receivable
5,000
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Allowance method
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At the end of each
period, the amount of potentially uncollectible accounts receivable is
estimated and recorded as the "allowance for doubtful
accounts"
Journal entry examples
1. December 31, 20X1
The
estimated amount of potentially uncollectible accounts receivable is
$20,000.
(Debit)
Bad debts expense
20,000
(Credit)
Allowance for doubtful accounts
20,000
2. On January 15,
20X2
One
customer filed bankruptcy and $3,000 receivable from that customer
should be written off.
(Debit)
Allowance for doubtful accounts
3,000
(Credit)
Accounts receivable
3,000
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Allowance for
doubtful accounts
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Methods of
estimating the amount of potentially uncollectible accounts receivable
1. Based on the percentage of sales amount
2. Based on the percentage of accounts receivable amount
3. Based on the aging schedule
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% of sales method
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An example
Entity A estimates that 3% of annual sales will be uncollectible.
Sales for 20X1 was $1,000,000
Journal entry example
(Debit)
Bad debts expense
30,000
(Credit)
Accounts receivable
30,000
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% of receivable
balance method
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An example
Entity A estimates that 6% of accounts receivable at the end of period
will become uncollectible.
Accounts receivable at December 31, 20X1 was $400,000
Journal entry example
(Debit)
Bad debts expense
24,000
(Credit)
Accounts receivable
24,000
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