Accounting For Receivables: Both AR and NR Are Called Trade Receivables

Faculty of Business
Accounting for
Receivables
What Are Receivables?
Amounts due from individuals and other companies that are expected to be collected in cash
It could be divided into 3 types
Accounts Receivables (AR) Notes Receivables (NR) Other Receivables
Amounts owed by customers Claims for which formal Non-trade (interest, loans to
that result from doing instruments of credit are issued officers, advances to
services. as proof of debt. employees, and income taxes
refundable).
Both AR and NR are called trade

receivables
1
Faculty of Business
We will deal with two accounting issues:
1. Recognizing accounts receivable.
2. Valuing accounts receivable.
First: Recognizing Accounts Receivable:
Service organization
Receivable recorded when it provides service on account.
Second: Valuing Accounts Receivable:
Accounts receivable is a current asset which is recorded by its net realizable value.
Services on account raise the possibility of accounts receivable not being collected
(Uncollectible Accounts)
They referred to as Allowances for Doubtful Accounts (AFDA).
AFDA: is a Contra Asset account, it has a Credit Nature
Net Realizable Value = Accounts Receivable – AFDA
How it’s shown in balance sheet?
Assets Liabilities & OE
AR XX
(-) AFDA (xx)
Net Realizable Value XX
2
Faculty of Business
How to record Allowance for doubtful accounts in the company books?

We use Allowance method:
 Better matching.
 Receivable stated at cash realizable value.
 Required by GAAP.
We will apply three steps:

1. Estimate & Record uncollectible accounts receivable.
Example: ABC Company has credit sales of $1,200,000 in 2012, of which $200,000
remains uncollected at December 31. The credit manager estimates that $12,000 of these
sales will be uncollectible.
Entry:
Bad debts expense 12,000 This entry is to

Allowance for Doubtful Accounts 12,000 record estimated
(AFDA) amount
On Dec. 31 The accounts will appear in the balance sheet as follow:
Assets Liabilities & OE
AR 200,000
(-) AFDA (12,000)
Net Realizable Value 188,000
3
Faculty of Business
2. Write off accounts proven to be uncollectible:
Example: ABC Co. on March 1, 2013 write-off of the $500 balance owed by XYZ The
entry to record the write-off is:
Entry:
This entry is to
AFDA 500 record Actual loss
AR 500
3. Recovery of an Uncollectible Account: the company collects amounts that are previously
written off, we will prepare 2 entries.
Example: On July 1, R. A. Ware pays the $500 amount that Hampson had written off
on March 1. We will record 2 entries
1st: revere entry of writing of receivable
AR 500
AFDA 500
2nd: Record Cash collection:
Cash 500
AR 500
4
Faculty of Business
Important : How to calculate the Bad debts expense under

the allowance method?
We have 2 approaches
Income Statement Approach Balance Sheet Approach

% of Sales % of Accounts Receivable
Important
2- Balance Sheet Approach

% of Accounts Receivable
1. % of AR:
Management establishes a percentage relationship between the amount of receivables and
expected losses from uncollectible accounts.
When using percentage of AR method the result from applying the percentage will be the
AFDA Ending Balance
How to calculate Bad debts expense?
AFDA beg. has Cr Balance (Normal Case) AFDA beg. has Dr Balance
Bad debts = AFDA end – AFDA beg. + write Bad debts = AFDA end + AFDA beg. + write
off off
5
Faculty of Business
Example (1) : This data is appeared from ABC records:
Dr Cr
Accounts Receivables 503,000
Allowances for Doubtful accounts 5,000
1. December, 31 2014 Jana Co. determined that XYZ account was uncollectible and wrote off
$3,000.
2. Allowance for doubtful accounts is estimated to be 2% of Accounts receivable.

Required: prepare necessary entry to record estimated bad debt & determine amount of
AFDA in balance sheet at the end of 2014.
Solution
31/12/2014: write-off Receivables
AFDA 3,000
AR 3,000
AR after Write-off = 503,000 – 3,000 = 500,000

AFDA after write-off = 5,000 – 3,000 = 2,000
AFDA after adjustment = 500,000 x 2% = 10,000
AFDA end = AFDA beg – AFDA written off + Bad debts expense
So, Bad debts = AFDA end – AFDA beg. + write off

Bad debts = 10,000 – 5,000 + 3,000 = 8,000
Entry:
Bad debts expense 8000
AFDA 8000
6
Faculty of Business
Balance sheet
Assets
AR 500,000
(-) AFDA (8,000)
Net Realizable Value 492,000
Question (2):
Solution
AFDA after adjustment = 30,000 x 10% = 3,000

Bad debts expense = AFDA after adj. + (Dr) AFDA before Adj.
= 3,000 + 2,000 = 5,000
Entry:
Bad debts expense 5000
AFDA 5000

Accounting For Receivables: Both AR and NR Are Called Trade Receivables

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Faculty of Business

It could be divided into 3 types

Accounts Receivables (AR) Notes Receivables (NR) Other Receivables

services. as proof of debt. employees, and income taxes

Both AR and NR are called trade

We will deal with two accounting issues:

1. Recognizing accounts receivable.

2. Valuing accounts receivable.

First: Recognizing Accounts Receivable:

Second: Valuing Accounts Receivable:

AFDA: is a Contra Asset account, it has a Credit Nature

Net Realizable Value = Accounts Receivable – AFDA

How it’s shown in balance sheet?

Assets Liabilities & OE

How to record Allowance for doubtful accounts in the company books?

We will apply three steps:

Bad debts expense 12,000 This entry is to

On Dec. 31 The accounts will appear in the balance sheet as follow:

Assets Liabilities & OE

2. Write off accounts proven to be uncollectible:

1st: revere entry of writing of receivable

2nd: Record Cash collection:

Important : How to calculate the Bad debts expense under

Income Statement Approach Balance Sheet Approach

2- Balance Sheet Approach

How to calculate Bad debts expense?

Example (1) : This data is appeared from ABC records:

2. Allowance for doubtful accounts is estimated to be 2% of Accounts receivable.

AR after Write-off = 503,000 – 3,000 = 500,000

AFDA after adjustment = 500,000 x 2% = 10,000

So, Bad debts = AFDA end – AFDA beg. + write off

AFDA after adjustment = 30,000 x 10% = 3,000

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