ACC 240 Lecture Notes - Lecture 12: Accounts Receivable, Bank Statement, Money Order
Expense Matching Principle
Bad Debt Expense should be recorded in the same accounting period as the related sales.
Allowance Method
Affects Sales Revenue. Most businesses record an estimate of the bad debt expense with an adjusting
entry at the end of the accounting period.
Two Methods of Estimating Bad Debt Expense
The bad debt expense amount recorded in the end-of period adjusting entry often is estimated based on
either: 1) A percentage of total credit sales for the period or 2) An aging of accounts receivable. (Both
Methods are acceptable under GAAP and are widely used).
Estimating Bad Debts- Percentage of Credit Sales Method
The percentage of credit sales method bases bad debt expense on the historical percentage of credit
sales that ultimately result in bad debts.
Aging of Accounts Receivable
The focus of the aging of accounts receivable method is on determining the desired balance int eh
Allowance for Doubtful Accounts on the balance sheet.
Practices That Can Help Minimize Bad Debts
Require approval of customers' credit history by a person independent of the sales and collections
function. Age accounts receivable periodically and contact customers with overdue payments. Reward
both sales and collections personnel for speedy collections.
Receivable Turnover Ratio
The receivables turnover ratio measures how many times average trade receivables are recorded and
collected for the year. Receivables Turnover= Net Sales/ Average Net Trade Accounts Receivable.
Average Collection Period
365/Receivables Turnover
Cash and Cash Equivalents
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Document Summary
Bad debt expense should be recorded in the same accounting period as the related sales. Most businesses record an estimate of the bad debt expense with an adjusting entry at the end of the accounting period. The bad debt expense amount recorded in the end-of period adjusting entry often is estimated based on either: 1) a percentage of total credit sales for the period or 2) an aging of accounts receivable. (both. Methods are acceptable under gaap and are widely used). Estimating bad debts- percentage of credit sales method. The percentage of credit sales method bases bad debt expense on the historical percentage of credit sales that ultimately result in bad debts. The focus of the aging of accounts receivable method is on determining the desired balance int eh. Allowance for doubtful accounts on the balance sheet. Require approval of customers" credit history by a person independent of the sales and collections function.
