Chapter 9 Big Picture
1) Difference Between A/R (Accounts Receivable) and N/R (Not Receivable)
2) Factoring
3) Bad Debt Expense
4) 2 Methods of A/c for Bad Debt
5) Debit and credit for each method
6) 2 ways of calculating A.D.A.
7) Calc. interest on N/R
CH. 9

Receivables = All money claims against other entities, including people, business firms, and other organizations. (Usually a significant portion of total current assets)

Accounts Receivable-Current asset paid before a year=(is the child of assets) - A claim against a customer created by selling merchandise or services on credit. (Collected within a sort period 30 of 60 days, classified as current assets on the balance sheet)

Notes Receivable-Long term assets or invest because they wil be paid after a year-(sell something on the account and the person is going to pay you back in payments. Installments= paid in agreed payments and are likely to pay interest) A customer’s written promise to pay an amount and possibly interest at an agreed-upon rate. (Notes are often used for more than 60 days. If notes receivables are noted to be collected before a year they will be categorized as a current asset on the balance sheet.)

Bad debt expense = The operating expense incurred because of the failure to collect receivables. (5 Indicators of bad dept expense are 1) the receivables is past due 2) The customer does not respond to company’s attempt to collect 3) The customer files for bankruptcy 4) the customer closes its business 5) the company cannot locate the customer)

Factoring- when u sell the accounts receivable to another company sometimes called debt collectors. The factor is the person who buys the account from the vendor. The creditor is the person who owes the money. The person who owes the money to the factor is going to have to pay interest on that det.

Two methods of accounting for uncollectable receivables
1) Direct write-off method = The method of accounting for uncollectible accounts that recognizes the expense only when accounts are judged to be worthless.
(Small companies use this method or privately owned)(There’s no time limit on either her selling it to a factor or even selling it to a factor)
**If I’m not going to get the money then I need to adjust the account so I don’t get taxed for it. Income is taxed, that’s why you want to make sure you make the adjustment or your going to pay more taxes.

May 10 Bad Debt Expense (Expense Account) Debit 4,200 Account Receivable (Assets) Credit 4,200

If a company has more than 500 or less than 500 employees and is privately owned it could use the Direct write off method.

Publicly traded have to use the Allowance method!!

Example 9-1 Different in the book than on the powerpoint slide

PE 9-1A Direct Write off Method Debit Credit
Feb 12 Cash 800 Bad Debt Expense 2,400 Accounts Receivable 3,200
May 3 Account Receivable 2,400 Bad Debt Expense 2,400 3 Cash 2,400 Accounts Receivable 2,400

2) Allowance method= Records bad debt expense by estimating uncollectable accounts at the end of the accounting period.
(Large companies, publicly traded companies use this method)
We still debit Bad Debt Expense for business write offs
We credit allowance for doubtful accounts
-Allowance for Doubtful Accounts = The contra asset account for accounts receivable. (is credited for the estimated bad debit) Based on industry Averages there’s an amount that wont be paid back.

Allowance method
1) Debit BDE / Credit ADA
2) Debit ADA / Credit AR
If the check turns up then you would just reverse the transaction!

**The similarity between Direct write off and Allowance method is that they both record bad debt but the difference is that direct write off is more specific regarding ever account and allowance method is more of a assumption of what’s going to need to be written off. **

USE EXAMPLE 9-2 TO STUDY FROM

PE 9-2A ALLOWANCE METHOD
On quiz*****