Class 5 Business
- Accounts receivable
o Credit terms extended to customers
For example customer cant pay turn the account receivable into a note
receivable (promisary note)
o If a promisary note is given with a time of 30 days and it is not paid what do you
Contact & question, Freeze future transactions, charge interest.
- Notes Receivable
o More formal agreement
o Includes a maker and payee
- Other Receivables
o Can include interest receivable, taxes receivable, and receivables from
employees or officers
Accounting for bad debts
- Direct write off method
o Records bad debt expense only when an account is deemed to be worthless
Reduce accoutns receivable and write off the debt.
The problem with direct write off method is that it is usually done many
many months after the initial sale, for example an invoice might be dated
for tday but I might not give up on it until December. December being
when I give up.
• Matching concept comes into play when I want to record the
expenses pertaining to the sales in the same period, I want to
match the expense to the revenue it gives rise too, Bad debts are
an expense and should be matched to the revenue that it gives
rise too, so whenever the sale is made you would increase
retained earnings for that month. So if a bad debt ends in
December you still have to record it for February, making direct
write off a violation of direct write off method.
o TL;DR: Direct write off method is always in violation of
matching concept because you should always record
debts for the month