Question

Describe the common classes of receivables,& Describe the accounting for uncollectible receivables.

Answer 1

Receivable means amount owed by the customers. The term receivable means some unsettled claim to the customers and which could be settled in short period of time. Receivable includes Debtors, Bills Receivable, Short term advances etc. There are three common classes of receivables.

1)      Account Receivable – Account receivable arises due to credit sale of goods or short term advances. Account receivables are normally gets realised in relatively short period of time say one or two months.

2)      Notes Receivable / Bills Receivables – Notes receivables are some written and signed documents by the customer where they give assurance to pay back the amount in near future of at a specified date. These type of receivables have high liquidity because it is negotiable in nature. Example – Bill of Exchange, Promissory Note etc.

3)      Other receivables – such other receivables which are expected to be collected in one financial year falls under this category. Generally these are known as other current assets. Example – EMD for tendering.

Accounting for Uncollectible Receivables

Uncollectible receivables are normally written off and shown in the profit and loss account to the debit side as a loss.

Journal Entry:

When Receivables arises

       Receivables A/c …………………… Dr

            To Customer’s A/c

For Uncollectible Receivables

       Bad Debt A/c ………………………Dr

            To Receivables A/c

For transferring the Bad Debt to Profit and Loss account.

            Profit & Loss A/c ……………………Dr

                  To Bad Debt.