Question

Bad debts on accounts receivable is_

While discount given to accounts receivable Is_

Answer 1

Bad Debts Expense on accounts receivable is

1. Bad debts expense is related to a company's current asset accounts receivable.

2. Bad debts expense is also referred to as uncollectible accounts expense or doubtful accounts expense.

3. Bad debts expense results because a company delivered goods or services on credit and the customer did not pay the amount owed.

Methods for reporting the amount of bad debts expense:

1. direct write-off method
2. allowance method

The direct write-off method requires that a customer's uncollectible account be removed from Accounts Receivable and at that time the following entry is made

: debit Bad Debts Expense and credit Accounts Receivable.

1. The allowance method anticipates and estimates that some of the accounts receivable will not be collected.

2. In other words, prior to knowing exactly which customers or clients will not be paying, the company will debit Bad Debts Expense and will credit Allowance for Doubtful Accounts for the estimated amount. (The Allowance for Doubtful Accounts is a contra asset account that when presented along with Accounts Receivable indicates a more realistic amount that will be turning to cash.)

For financial statement purposes the allowance method is the better method since

1) the balance sheet will be reporting a more realistic amount that will be collected from the company's accounts receivable,

and 2) the bad debts expense will be reported on the income statement closer to the time of the related credit sales. However, for income tax purposes the direct write-off method must be used.

Discount Given to Accounts Recievable

Some companies find that offering incentives to credit customers can help encourage early payments, increasing cash flow and reducing the risk of bad debt. A sales discount is one incentive that many companies implement successfully. Sales discounts permit customers to reduce the invoice payment in exchange for paying within a defined period, such as two weeks from the invoice date. Understanding the accounting procedures and the effects on the balance sheet help you determine how to record the transactions

Accounts receivable is a current asset on the balance sheet. This account is the detail of one of the company's largest sources of incoming cash. Because it is considered a current asset, it is the goal of the business to turn the receivables into cash within the current 12-month accounting cycle. When the customer pays the invoice, it eliminates that portion of the receivable balance. Depending on how you recognize discounts, the sales discount might have an immediate effect on the balance sheet as a receivable or have no effect at all.

Gross Method of Receivable Accounting

The standard method of recognizing a receivable is with a credit to the sales account and a matching debit to accounts receivable for the amount of the sale. If a discount is available on the invoice, and the customer pays within the discount period, the offset entry reflects a credit to the receivable for the full invoice balance, then a credit to cash for the amount the customer paid and a credit to the discounts and allowances account for the difference. In this format, there is no effect on the balance sheet, only the income statement.

Net Method of Receivable Accounting

If historical accounting indicates that the vast majority of credit customers pay their invoices within the credit period, the net receivable method might be the most accurate way to record your receivables. Under this method, the receivable is recognized with a debit in the amount of the invoice less the sales discount, and a matching credit to the sales account. If a customer pays the invoice after the discount date, record the additional amount as a debit to the interest income account as an interest fee paid by the customer for paying outside of the discount period. Again, in this instance, the variance appears on the income statement, not the balance sheet. An organization that is bound by or has chosen to follow generally accepted accounting principles (GAAP) should not use this method for accounting.

Considerations

A discount offered on receivables can have a direct effect on your balance sheet if a customer chooses to take advantage of the discount when they are not eligible. This will leave an outstanding receivable on the balance sheet in the amount of the discount, unless you opt for a bad-debt write-off for that portion. Monitor your receivables aging to be sure that invoices are paid in a timely manner and in full when required