ACCOUNTS RECEIVABLE & BAD DEBTS EXPENSE

WHAT IS ACCOUNTS RECEIVABLE & BAD DEBTS EXPENSE ?

Providing sales and services on credit creates a situation for a potential loss if the customer does not pay. Some of the terminology involved includes:

accounts receivable claim resulting from the delivery of goods or services on credit. bad debts expense an operating expense resulting from not collecting accounts receivable direct write-off method no allowance account; when an account is determined to be worthless, Accounts Receivable is credited, and Bad Debts Expense is debited. allowance for doubtful accounts a contra asset account (an asset account with a credit balance) that reports the estimated amount of accounts receivable that might not be collected; this account balance in combination with the balance in accounts receivable provides the estimated net realizable value of the accounts receivable. allowance method an accounting method that anticipates that some of the accounts receivable will not be collected; results in a contra asset account Allowance for Doubtful Accounts; bad debts expense is reported earlier than using the direct write-off method. percentage of sales a technique under the allowance method where Bad Debts Expense is debited for a percentage of the credit sales and the Allowance for Doubtful Accounts is credited for the same amount in order to achieve the matching principle.
percentage of accounts receivable a technique under the allowance method where the balance in the account Allowance for Doubtful Accounts is adjusted to an estimated percentage of the asset accounts receivable. The adjustment amount is debited to Bad Debts Expense. aging of accounts receivable a report which sorts the accounts receivable according to the date of the sales invoice; often used as the percentage of accounts receivable technique for determining the correct balance in Allowance for Doubtful Accounts. recovery of bad account collecting an account receivable that was previously written off; under the allowance method two entries are required: (1) debit Accounts Receivable and credit Allowance for Doubtful Accounts for the amount that is recovered, and (2) debit Cash and credit Accounts Receivable for the amount recovered.