This accounting tutorial is a great
learning tool that will help you understand "net realizable
value," the allowance account and calculating the amount
for the adjusting entry.
You should read the related chapter in your textbook and
attempt some exercises. When you come to a stumbling
block, just click on the Bad Debts tutorial
It is easy to use. This accounting tutorial
shows you step by step how to calculate the amount
required for the adjusting entry using either the
analysis of accounts receivable method or the
percentage of sales method. All you have to do is click your mouse and you
move through the tutorial. Go through them as fast or as
slow as you want. You are in control.
This accounting tutorial covers the steps that are taken to
evaluate the accounts receivable account. Companies are
required to properly state their assets. The gross
amount of accounts receivable are rarely 100% collected.
Some of the customers (clients) will not pay. These are called
bad debts. Some books may refer to them as
uncollectible accounts or doubtful accounts. There are
numerous reasons that companies fail to pay. For our purposes, the reasons
aren't important. We just need to make the calculations
that will allow us to place a more reasonable value on
all of the accounts. This adjustment requires the use of a new
contra-asset. It is the Allowance for bad debt account.
Click on the link below and get started.
Your quizzes and tests will have questions requiring you to know definitions. Make sure you are ready.
Review the "Accounts receivable" terms.
Frequently Asked Questions
Q. Can a company use both methods to estimate bad debts?
A. No. The company will choose one method and stick with it. They may later change to
the other method. This is discouraged and usually a lot of time must pass (years) before they can make the change.
Q. Which is the best method?
A. There is no best method. Each company must determine for itself which method is best for it.
The company chooses the method that provides the appropriate value for accounts receivable and the
resulting bad debts expense for it. Once their decision is made, they are locked into it for many years.
Q. What if the company has no bad debts?
A.That isn't likely. However, if a company has very few bad accounts, it can use the direct write-off method. That means that
when it comes to their attention that a customer's account will never be collected, the company will call that amount a bad debt expense.
The rule-making groups that set guidelines for accounting suggest that the direct write-off method not be used unless the anticipated
bad debts of the company are expected to be insignificant to both the balance sheet and income statement.