accounting for acc receivable

7/28/2019 Accounting for Acc Receivable

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ACCOUNTINGFOR

ACCOUNTS RECEIVABLE


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LEARNING OUTCOMES

At the end of the session, students are able to:

Differentiate between bad debts and doubtfuldebts;

Differentiate between discount allowed anddiscount allowable;

Make adjustment on account receivables for

bad debts expense and bad debts recoveredif any; and

Calculate and record allowance for doubtful

debts and allowance for discount allowable.


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INTRODUCTION

Most of business sales are on credit basis.

Customers are allowed to make payment at

later date.Credit term exposes business to RISKS that

some of the customers may never pay for the

goods sold or services rendered to them.


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PAYMENT STRUCTURE AND

TREATMENT IN THE FIN. STMNTS

INCOME

STATEMENT

BALANCE

SHEET

a Very prompt payment Discount allowed

b Future discount allowed Discount allowable Allowance for

discount allowable

c Just in time payment No discount given

d Reluctant to pay Doubtful debt Allowance fordoubtful debt

e Unable to pay (bankrupt

or dead)

Bad debt

f Settlement of debt after

debt had beenconsidered as bad

Bad debt recovered


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BAD DEBT EXPENSE

Certain and proven that debtor could not

settle the debt.

Effect on income statement:Uncollected amount will be treated as bad debt

expense as to reduce profit of business.

Effect on balance sheet:

The uncollected amount will be deducted from

the account receivables as to reduce current

asset of business.


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WORKED EXAMPLE

Additional information as at 31/12/2010:

Debts of RM500 are to be written off as bad.

Trial Balance as at 31/12/2010 (extract)

DR CR

Account Receivables 9,000


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INCOME STATEMENT FOR THE YEAR ENDED 31/12/2010 (EXTRACT)

RM RM RMOperating Expenses

Bad debts 500

ACCOUNT YEAR-END

BALANCES

ADJUSTMENT BALANCE AFTER

ADJUSTMENT

Accountreceivables 9,000 - 500 8,500

BALANCE SHEET AS AT 31/12/2010 (EXTRACT)

RM RM RM

Current Assets

Account receivables 8,500


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BAD DEBT RECOVERED

Payments received from debtors whose

debts had been written off as bad.

Effect on income statement:A bad debt recovered is considered as revenue;

to increase profit of business.

Effect on balance sheet:

Payments received will increase asset of cash in

the balance sheet.


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WORKED EXAMPLE


One of the debtors whose debt hadpreviously been written off as bad sent a

cheque for RM1,000 in full settlement of the

amount owing.


DR CR


Bank 14,000


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RM RM RM

Other revenues

Bad debts recovered 1,000

ACCOUNT YEAR-END

BALANCES


ADJUSTMENT

Bank 14,000 + 1,000 15,000


RM RM RM

Current Assets

Account receivables 9,000

Bank 15,000


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DOUBTFUL DEBT AND ALLOWANCE

FOR DOUBTFUL DEBT

Estimation on the amount that will not be collectedis known as doubtful debt.

Allowance for doubtful debt (AFDD) = % x accounts

receivable (after bad debt) Effect on balance sheet:

AFDD reduces accounts receivable

Effect on income statement: In the first year; doubtful debt estimated will be recorded

in full (worked example 1)

For the next and the following year; record only theincrease or decrease in the estimation (worked example

2)


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WORKED EXAMPLE (1)


A debtor owing RM200 was unable to settle

his debt and this amount is to be written offas bad debt.

The allowance for doubtful debt is 2% on the

outstanding accounts receivable.


DR CR



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CALCULATION

Allowance for doubtful debt

= % x outstanding accounts receivable

= 2% (8,900 200)= 176


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RM RM RM

Operating Expenses

Bad debts

Doubtful debt

200

176

ACCOUNT YEAR-END

BALANCES


ADJUSTMENT

Account

receivables

8,900 - 200 8,700


RM RM RM

Current Assets

Account receivables

(-) Allowance for doubtful

debt

8,700

(176) 8,524


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WORKED EXAMPLE (2)


One of the customer was declared bankrupt and

unable to settle his debts. The customer still owedRM2,000.

The allowance for doubtful debt is 5% on the


Trial Balance as at 31/12/2010 (extract)DR CR


Allowance for doubtful debts 1,000Bad debts 1,000


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CALCULATION



= 5% (50,000 2,000)= 2,400

AFDD 1,000

Adjusted to 2,400

Increase in doubtful debt 1,400

ACCOUNT YEAR END ADJUSTMENT BALANCE AFTER


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RM RM RMOperating Expenses

Bad debts

Doubtful debt

3,000

1,400

ACCOUNT YEAR-END

BALANCES


ADJUSTMENT

Account

receivables

50,000 - 2,000 48,000

Bad debts 1,000 + 2,000 3,000

Allowance for

doubtful debt

1,000 + 1,400 2,400


RM RM RM

Current Assets

Account receivables


debt

48,000

(2,400) 45,600


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DISCOUNT ALLOWABLE AND ALLOWANCE

FOR DISCOUNT ALLOWABLE (AFDA)

Estimation on the amount of discount that may beallowed to customers who may pay within thediscount period.

AFDA = % x ((accounts receivable (after bad debt) AFDD)

Effect on balance sheet:AFDA reduces accounts receivable

Effect on income statement: In the first year; discount allowable estimated will be

recorded in full (worked example 1)

For the next and the following year; record only the

increase or decrease in the estimation (worked example2)


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WORKED EXAMPLE (1)


Debts of RM500 are to be written off as bad.

The allowance for doubtful debt and discountallowable are 2% and 1% respectively of the



DR CR



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CALCULATION



= 2% (200,000 500)

= 3,990

Allowance for discount allowable

= % x (outstanding accounts receivableAFDD)

= 1% ((200,000 500) 3,990)

= 1,955

ACCOUNT YEAR END ADJUSTMENT BALANCE AFTER


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RM RM RM

Operating Expenses

Bad debts

Doubtful debtDiscount allowable

500

3,9901,995

ACCOUNT YEAR-END

BALANCES


ADJUSTMENT

Account

receivables

200,000 - 500 199,500


RM RM RM

Current Assets

Account receivables


debt

(-) Allowance for discountallowable

199,500

(3,990)

(1,995) 193,515


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WORKED EXAMPLE (2)


Allowance for doubtful debts to be increased to

RM1200; and the allowance for discount allowable

to be based on 2% of net accounts receivable.


DR CR


Bad debts 1,290

Allowance for doubtful debts 900

Allowance for discount allowable 300


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CALCULATION

AFDD = 1,200

AFDD 900

Adjusted to 1,200

Increase in doubtful debt 300

AFDA = 2% (( 39,600) 1,200)

= 768

AFDA 300

Adjusted to 768

Increase in discount allowable 468

ACCOUNT YEAR-END ADJUSTMENT BALANCE AFTER


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RM RM RM

Operating Expenses

Bad debts

Doubtful debt

Discount allowable

1,290

300

468

ACCOUNT YEAR-END

BALANCES


ADJUSTMENT

Account receivables 39,600 0 39,600

Allowance for doubtful

debt

900 + 300 1,200

Allowance for discount

allowable

300 + 468 768


RM RM RM

Current Assets

Account receivables

(-) Allowance for doubtful debt

(-) Allowance for discount allowable

39,600

(1,200)

(768) 37,632


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JOURNAL ENTRIESTRANSACTION DR CR

a To record bad debts writtenoff from accounts receivable Bad debts Acc. receivable

b To record the recovery of bad

debts

Cash/bank Bad debts

recovered

c To record an increase in

doubtful debt estimation

Doubtful debts Allowance for

doubtful debt

d To record a decrease in

doubtful debt estimation

Allowance for

doubtful debt

Doubtful debts

e To record increase in

allowance for discount

allowable

Discount

allowable

Allowance for

discount

allowable

f To record decrease in

allowance for discount

allowable

Allowance for

discount

allowable

Discount

allowable

g To record discount allowed todebtors Discountallowed Acc. receivable

accounting for acc receivable

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