Due to the fact that customers carry out not always store their guarantees to pay, suppliers must carry out for these uncollectible accounts in their documents. Companies usage two methods for taking care of uncollectible accounts. The direct write-off approach recognizes bad accounts as an expense at the suggest as soon as judged to be uncollectible and also is the compelled strategy for federal income taxation functions. The allowance approach gives in breakthrough for uncollectible accounts think of as setting aside money in a reserve account. The allowance approach represents the accrual basis of bookkeeping and also is the accepted strategy to record uncollectible accounts for financial bookkeeping functions.

You are watching: Two methods of estimating uncollectible receivables are ________.

Direct Write-off

The straight write-off method is used only when we decide a customer will certainly not pay. We do not document any approximates or usage the Allowance for Doubtful Accounts under the direct write-off technique. We record Bad Debt Expense for the amount we determine will not be paid. This strategy violates the GAAP equivalent principle of earnings and also prices recorded in the exact same period.

When we write-off an account under this strategy, the enattempt would certainly be:

Debit Credit

Bad Debt Expense X

Accounts Receivable X

The amount used will be the amount the customer owes that we will certainly not have the ability to collect.

Allowance Method

The allowance technique complies with GAAP corresponding principle since we estimate uncollectible accounts at the end of the year. We usage this estimate to record Bad Debt Expense and also to setup a reserve account called Allowance for Doubtful Accounts (also called Allowance for Uncollectible Accounts) based on previous endure through past due accounts. We have the right to calculate this approximates based upon Sales (revenue statement approach) for the year or based on Accounts Receivable balance at the time of the estimate (balance sheet approach).

As a contra asset account to the Accounts Receivable account, the Allowance for Doubtful Accounts (also called Allowance for uncollectible accounts or Allowance for poor debts) reduces accounts receivable to their net realizable value. Net realizable value is the amount the company expects to collect from accounts receivable. When the firm renders the negative debts adjusting entry, it does not know which specific accounts will certainly come to be uncollectible. Thus, the firm cannot enter credits in either the Accounts Receivable control account or the customers’ accounts receivable subsidiary ledger accounts. If just one or the other were credited, the Accounts Receivable manage account balance would certainly not agree via the full of the balances in the accounts receivable subsidiary ledger. Without crediting and enhancing the Accounts Receivable control account, the allowance account lets the agency display that some of its accounts receivable are probably uncollectible.

When we decide a customer will not pay the amount owed, we use the Allowance for Doubtful accounts to counter this loss instead of Bad Debt Expense.

At the finish of every year, we ESTIMATE poor debts expense and make the following entry:

Debit Credit

Bad Debt Expense X

Allowance for Doubtful Accounts X

The amount offered will be the ESTIMATED amount calculated utilizing sales or accounts receivable.

When we write-off a customer account under the allowance technique, the entry would be:

Debit Credit

Allowance for Doubtful Accounts X

Accounts Receivable X

Notice how we execute not use bad debts cost in a write-off under the allowance approach.

 Accounting in the Headlines

Let’s attempt and also make accounts receivable more pertinent or understandable making use of an actual agency.

What does Coca-Cola’s Form 10-k communicate around its accounts receivable?

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The Coca-Cola Company (KO), prefer other UNITED STATE publicly-held providers, records its financial statements in an annual filing called a Form 10-K with the Securities & Exadjust Commission (SEC).


Coca-Cola has several assets that are provided on its balance sheet. Let’s look at what is reported on Coca-Cola’s Form 10-K regarding its accounts receivable. A 10-K is another name for a company’s annual report. Furthermore, a 10-Q is a company’s quarterly report.

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See the following excerpts from Coca-Cola’s 2013 Form 10-K:

Partial Consolidated Balance Sheets containing current assets (page 76);Trade Accounts Receivable note (web page 89); andPartial Statements of Income (web page 74).

Questions

What is the total (gross) worth of Coca-Cola’s accounts receivable (before deduction for its allowance for doubtful accounts) as of December 31, 2013? As of December 31, 2012?What is “net realizable value”?What factors does Coca-Cola usage to recognize the amount of its allowance for doubtful accounts?In what line item on the earnings statement would bad debt expense be included?