FINANCIAL ACCOUNTING II
Faculty of Business Administration
Department of Finance, Banking and Accounting
Prof. Dr. Sameh Reyad, CMA
Dr. Christine Yacoub
2025
Course information
Course Instructor: Course Instructor:
Prof. Dr. Sameh Reyad, CMA Dr. ChristineYacoub
[email protected] [email protected]Office: M.421 Office:M.418
Office hours: Thursday 11:45- 1:15 Officehours: Wednesday 4thslot
Course Assistants:
Ms. Mariam Hussein
Mr. Basel Loay
Ms. Lma Haitham
Ms. Farida Gado
Mr. Abderahman Mostafa
2
Course information
Course Assessment: Course Textbooks: Course Content:
Quizzes • Jerry J.Weygandt, Paul D. • Accounting for
(Best 2 out of 3) 15% Kimmel Donald E. Kieso Merchandising Operations
(2018). Accounting Principles. • Accounting for Receivables
In-class Assignments • Plant Assets: Depreciation
13th edition. John Wiley &
(Best 4 out of 6) 15% and disposals
Sons, Inc.
Midterm ISBN: 978-1-119-41101-7 • Current Liabilities
30% • Long- Term Liabilities:
• Jerry J. Weygandt, Paul D. Bonds issuance and
Final
Kimmel, Jill E. Mitchell retirement
40 % • Accounting for
(2022). Accounting Principles,
14th edition. John Wiley & Corporations
Sons, Inc.
ISBN: 9781-119-707080
3
Lecture Three
Accounting for Receivables
Learning Objectives
After studying this Lecture, you should be able to:
- Identify the different types of receivables.
- Explain how companies recognize accounts receivable.
- Explain the statement presentation and analysis of receivables.
- Methods of Accounting for Uncollectible Accounts: Direct Write-Off&
Allowance Method
- Estimate Allowance for Doubtful Accounts: Percentage of Sales method &
Percentage of Receivables method
Types of Receivables
Amounts due from individuals and other companies that are
expected to be collected in cash.
Amounts owed by Written promise for “Nontrade”
customers that result amounts to be (interest receivable,
from the sale of goods received. advances to employees).
and services
(oral promise).
Accounts Notes Other
Receivable Receivable Receivables
A company must maintain a separate account for each customer that tracks how much
that customer purchases, has already paid, and still owes.
Two accounting issues regarding receivables:
1. Recognizing accounts receivable.
2. Valuing accounts receivable.
1- Recognizing Accounts Receivable:
◆ Service organization records a receivable when it performs service on account.
◆ Merchandiser records accounts receivable at the point of sale of merchandise on
account.
2- Valuing Accounts Receivables
Alternative Terminology
You will sometimes see
◆ Current asset. Bad Debt Expense called
Uncollectible Accounts
◆ Valuation (net realizable value). Expense.
Uncollectible Accounts Receivable
◆ Sales on account raise the possibility of accounts not being collected.
◆ Some customers may not pay their account. Uncollectible amounts are
referred to as bad debts.
◆ Seller records losses that result from extending credit as Bad Debts Expense.
Methods of Accounting for Uncollectible Accounts
Direct Write-Off Allowance Method
Theoretically undesirable: Losses are estimated:
◆ Receivable not stated at net realizable value. ◆ Receivable stated at net realizable value.
◆ Not acceptable for financial reporting. ◆ Required by GAAP.
◆ J.E/Dr. Bad Debts Expense ◆ J.E/ Dr. Bad Debt Expense
Cr. Accounts Receivable Cr. Allowance for Doubtful Accounts
We need to make an allowance for doubtful accounts to ensure that a
company's financial statements reflect a more accurate and realistic view of
its accounts receivable.
We have two Forms:
ABC Corporation
Balance Sheet (partial)
Current Assets:
Cash $ 330
Accounts receivable 500
Less: Allowance for doubtful accounts (25) 475
Inventory 812
Prepaid expense 40
Total current assets 1,657
Alternate
ABC Corporation Presentation
Balance Sheet (partial)
Current Assets:
Cash $ 330
Accounts receivable, net of $25 allowance 475
Inventory 812
Prepaid expense 40
Total current assets 1,657
Allowance Method for Uncollectible Accounts
1. Companies estimate uncollectible accounts receivable.
2. Debit Bad Debts Expense and credit Allowance for Doubtful Accounts
(a contra-asset account).
Dr. Bad Debt Expense
Cr. Allowance for Doubtful Accounts
3. Companies debit Allowance for Doubtful Accounts and credit Accounts
Receivable at the time the specific account is written off (Removed) as uncollectible.
Dr. Allowance for Doubtful Accounts
Cr. Accounts Receivable
Illustration:
1- Hampson Furniture has credit sales of $1,200,000 in 2017, of which $200,000
remains uncollected on December 31. The credit manager estimates that $12,000
of these sales will prove uncollectible.
RECORDING ESTIMATED UNCOLLECTIBLES
Dec. 31 Bad Debt Expense 12,000
Allowance for Doubtful Accounts 12,000
The amount of $188,000 represents the expected Net realizable value of
the accounts receivable at the statement date.
LO 2
2- The vice-president of finance of Hampson Furniture on March 1, 2018,
authorizes a write-off of the $500 balance owed by R. A. Ware. The entry
to record the write-off is:
RECORDING WRITE-OFF OF AN UNCOLLECTIBLE ACCOUNT
Mar. 1 Allowance for Doubtful Accounts 500
Accounts Receivable—R. A. Ware 500
General ledger balances after write-off
3- On July 1, R. A. Ware pays the $500 amount that Hampson had written off
on March 1. Hampson makes these entries:
RECOVERY OF AN UNCOLLECTIBLE ACCOUNT
July 1 Accounts Receivable—R. A. Ware 500
Allowance For Doubtful Accounts 500
Cash 500
Accounts Receivable—R. A. Ware 500
ESTIMATING THE ALLOWANCE (ESTIMATING BAD DEBTS EXPENSE)
Management establishes a percentage
Management estimates what percentage
relationship between the amount of
of credit sales will be uncollectible.
receivables and expected losses from
This percentage is based on past
uncollectible accounts.
experience and anticipated credit policy.
- Percent of Accounts Receivable
- Aging of Accounts Receivable
Illustration:
Assume that Karim Company elects to use the percentage-of-sales basis. It concludes that 1% of
net credit sales will become uncollectible. If net credit sales for 2021 are $800,000.
The Journal entry is:
The estimated Allowance for Doubtful Accounts= Current period net sales × Bad Debt %
The estimated Allowance for Doubtful Accounts= * $800,000 x 1% = 8000
*
Dec. 31 Bad Debt Expense 8,000
Allowance For Doubtful Accounts 8,000
◆Emphasizes matching of expenses with revenues.
◆The entry to record bad debts disregards the existing balance in Allowance for Doubtful Accounts.
Illustration:
Assume that Lyla Company has $50,000 in accounts receivable and a $200 credit balance in
Allowance for Doubtful Accounts on December 31, 2021. Past experience suggests that 5% of
receivables are uncollectible.
The Journal entry is:
1- The estimated Allowance for Doubtful Accounts= Year-end Accounts Receivable × Bad Debt %
2- Current Bad Debts Expense= The estimated Allowance for Doubtful Accounts (–) Previous Balance
in Allowance Account (Cr. Balance) or (+) Previous Balance in Allowance Account (Dr. Balance)
1- The estimated Allowance for Doubtful Accounts= 50000* 5%= 2500
2- Current Bad Debts Expense = 2500- 200= 2300
Dec. 31 Bad Debt Expense 2,300
Allowance For Doubtful Accounts 2,300
Illustration:
Assume the trial balance shows Allowance for Doubtful Accounts with a credit balance of $528.
Prepare the Journal entry for the bad debts expenses assuming $2,228 is the estimate of uncollectible
receivables from the aging schedule.
Aging the accounts receivable means that the customer balances are classified by the length of
time they have been unpaid. The companies may use many percentage rates on number of days
past due instead only a single percentage rate.
Current Bad Debts Expense = 2228- 528= 1700
Dec. 31 Bad Debt Expense 1,700
Allowance For Doubtful Accounts 1,700
Example: (ABC) Company had the following amounts in its unadjusted trial balance as
of December 31, 2020:
Debit Credit
Cash 15,000$
Accounts receivable 42,500$
Allowance for doubtful accounts 2,000$
Cash sales 12,300$
Credit sales 38,000$
Instruction: Prepare the Journal entry to estimate bad debts expense under Allowance
Method for the following separate situations:
1- Percentage-of-sales method: Bad debts are estimated to be 10% of credit sales.
2- Percentage-of-receivables method: Bad debts are estimated to be 15% of the
outstanding accounts receivable.
Case 1:
Bad Debts Expense = 38,000$ × 10% = 3,800$
Dec.31 Bad Debts Expense 3,800
Allowance for doubtful account 3,800
Case 2:
The estimated Allowance for Doubtful Accounts = 42,500$ × 15% = 6,375$
Current balance in allowance account (Cr.) = 2,000$
Current Bad Debts Expense = 6,375 – 2000= 4,375$
Dec.31 Bad Debts Expense 4,375
Allowance for doubtful account $4,375
Example: The trial balance of Risen Company reports the following balances:
Dr. Cr.
Accounts receivable $100,000
Allowance for doubtful accounts $ 2,500
Sales (all on credit) 750,000
Sales returns and allowances 40,000
Instructions:
(a) Prepare the entries for estimated bad debts assuming that doubtful accounts are estimated to be
(1) 6% of gross accounts receivable and (2) 1% of net sales.
(b)Assume that all the information above is the same, except that the Allowance for Doubtful
Accounts has a debit balance of $2,500 instead of a credit balance.
(c) Assume that all the information above is the same but instead of estimating the uncollectable
at 1% of net sales, assume the company prepares an aging schedule that estimates total
uncollectible accounts at 5,600.
The Answer:
(a) (1) Gross receivables $100,000
Rate 6%
The estimated allowance 6,000
Current allowance (2,500)
Bad debt expense $ 3,500
Bad Debt Expense 3,500
Allowance for Doubtful Accounts 3,500
(2) Sales $750,000
Sales returns and allowances (40,000)
Net sales 710,000
Rate 1%
Bad debt expense $ 7,100
Bad Debt Expense 7,100
Allowance for Doubtful Accounts 7,100
b) The percentage of receivables approach would be affected as follows:
Gross receivables $100,000
Rate 6%
The estimated allowance 6,000
Current allowance 2,500
Bad debt expense $ 8,500
The journal entry is therefore as follows:
Bad Debt Expense 8,500
Allowance for Doubtful Accounts 8,500
c) Bad Debt Expense 3,100
Allowance for Doubtful Accounts 3,100
($5,600 – $2,500)
Thank you
