Free Accounting Tutorials

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 below.

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.







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