Question

Question 10: Business management identifies that the longer an accounts receivable remains outstanding, the less likely the business will collect the receivable from the customer. Identify a method/approach that is appropriate for accounting for uncollectible receivables in this case and describe the method/approach including why it is appropriate (when describing, please describe how bad debt expenses are recorded using the method/approach, and/or provide an example of the journal entry required). Identify and describe the method/approaches that are less appropriate for accounting for uncollectible receivables in this case (when describing, please describe how bad debt expenses are recorded using the method/approaches, and/or provide examples of the journal entries required).

Clearly label each part of your answer as follows:
Appropriate method and approach is..........
Less appropriate methods and approaches are.........

Answer 1

A bad debt expense is recognized when a receivable is no longer collectible because a customer is unable to fulfill their obligation to pay an outstanding debt due to various reasons

The appropriate method is using accounts receivable is aging method and approach is grouping all accounts receivable by age and certian percentage is assigned to each group ( this percentage is calculated or derived from using statistical methods and past experience )

The sum total of all groups result are deemed uncollectable

Eg : If a company has $100000 accounts receivable less than 30 days outstanding and $50000 accounts receivable outstanding for more than 30 days, Based on statistical model or past experience, receivable outstanding for less than 30 days is estimated 1% uncollectable and receivable outstanding for more than 30 days is estimated 5% uncollectable then ;

100000 ×1% =1000

50000 × 5% = 2500

A sum of $3500 is created as provision bad debt expence

Journal entries

Credit Sale

Accounts Receivable (Debit)

Sale Account (Credit)

Creating Provision for Bad Debt

Allowance for doubtful accounts (Debit)

Account Receivable   (Credit)

Bad Debt realization

Bad debt expence (debit)

Allowance for doubtfull accounts (credit)

The less appropriate method is Direct write off method and the process is to recognize uncollectable accounts and directly write off those accounts as bad debt expences this method is used for Us Tax purposes but this method goes against Matching principle of accrual accounting and GAAP

The matching principle requires the expences to be matched with related revenues in the same accounting period

Journal entry for Diarect Writeoff method

Bad debt expence (Debit)

Accounts receivable (Credi)