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6.2 Accounts Receivable-measurement (overview (The principal measurement…
6.2 Accounts Receivable-measurement
overview
noninterst-bearing assets are reported at net realizable value (NRV)
Net of allowance for uncollectible accounts and billing adjustment
The principal measurement issue for accounts receivable is
estimation of net realizable value for BS
related uncollectible accounts expenses
Balance sheet approach
the ending balace of the allowance for uncollectible account is a % of the ending balance of the AR
Bad debt expense reflects the adjustment of the allowance to its correct ending balance
The approaches to accounting for bad debts are
Direct write-off method
no matching principle applied
It does not state receivables at net realizable value
Use for tax purpose
Allowance Method (Require under GAAP)
match bad debt expense with the related revenue
Systematic records bad debt expense as a % of either sales or the level of accounts receivable on the accrual basis
The JE: Debt: Bad Debt Expenses ;
Credit: Allowance for uncollectable Accounts
As specific AR are written off, they are charged to the allowance account
Write-off of a particular bad debt has no effect on expenses
Write-off do not have the effect the carrying amount of net accounts receivable because the reductions of gross accounts receivable and allowance are the same
Gross AR-Allowance for uncollectible account=NRV of AR
Income Statement Approach
treats bad debts as a function of sales on account
Matching Principle
Periodic bad debt expense is a % of sales on credit
Collection of Accounts Previously Written off
first, need to reestalish the account for the amount of the customer has agreed to pay
the second the receipt of cash
Bad debt expense is not affected when
an account receivable is written off
an account previously written off becomes collectible