AA015 TOPIC 7

FINANCIAL ACCOUNTING
AA015

KOLEJ MATRIKULASI
NEGERI SEMBILAN
SESSION 2020/2021

Topic 7

Accounting for
Receivables

Learning objectives

Definition of Account receivables
Valuation of Account receivables
Bad debts

Accounting methods for bad debts

Recovery of bad debts

Presentation of Account Receivables
in the Financial Statements

Definition of accounts receivable

❖ Accounts receivable refers to money owed by
customers in exchange for goods or services
that have been delivered or used, but not paid
yet.

❖ Accounts receivable is collected within a credit
terms.

❖ Credit terms – indicate when payment is due
for sales made on credit. It is normally in terms
of 30 or 60 days.

Example : transaction that involved
account receivable

Sold goods on credit RM2,000 to Encik Ali
Suman with credit terms 2/10, n/30 on 1st July

2015

Refering to the example above, Encik Ali
is a debtor starting from the date of sales
on credit is made.

Bad Debts

1. Accounts receivable that is not collected after the due
date of credit terms.

2. The factors of bad debts:

a. Bankcruptcy of a debtor
b. The debtor is insane
c. The death of the debtor
d. The debtor cannot be traced
3. Recorded as a bad debts expense under operating
expenses in the Profit or Loss Statement.

Valuation of accounts receivable

When a debtor is unable to pay his debt
after the due date of credit terms, the
accounts receivable(uncollected) will be
classified as bad debts.

Valuation of Accounts Receivable

In the financial position, accounts receivable is recorded as
follow:-

Syarikat ARC
Statement of Financial Position (extracted)

As at 30 June 2015

Accounts Receivable 120,000
Less: Provision for doubtful debt 10,000

Net Realizable 110,000
Value

Valuation of accounts receivable

Bad debts expense is shown in the Profit or
Loss Statement as it follows the Expenses
Recognition Principle.
Increasing in the Provision for Doubtful Debts
follows the Expenses Recognition Principle.
Decreasing in the Provision for Doubtful
Debts follows the Revenue Recognition
Principle.

Methods in accounting for
uncollectible accounts

Allowance Direct write-
method off method

Percentage of Receivables
Balance Basis

Percentage of Sales Basis :
i. Credit sales
ii. Net credit sales

DIRECT WRITE-OFF
METHOD

Direct write-off method

Uncollectible accounts receivable
determined by management to be
written off directly from accounts
receivable

Journal entry:-
Writting off bad debt

Date Details Dr Cr
(RM) (RM)
31st Bad debts expenses
Dec. Account receivable 5,000
5,000
(To record write off Accounts
Receivable)

Example

On 31st December 2015, the balance of accounts
receivable is RM148,000. As at the date, a debtor’s
name Ali is unable to pay his debt RM4,800.

Journal entry:-
Writting off bad debt

Date Details Dr Cr
(RM) (RM)
31 Bad debts expenses
Dec. 4,800
Account Receivable - Ali 4,800

( to record writing off Ali’s
Account)

Allowance Method

 Estimated uncollectible accounts becomes Bad Debts on
the basis of :
i. Percentage of Sales
ii. Percentage of Receivables

 Bad debt expense is to be match with Allowance For
Doubtful Debt Account.

 Allowance for Doubtful Debt contra accounts to Accounts
Receivable in the Statement of Financial Position.

PERCENTAGE OF
RECEIVABLES BASIS

Percentage on the balance of account
receivable method

Percentage x Closing = Closing balance
of allowance balance allowance for
accounts Doubtful Debt
(%) receivable

Example 1: Percentage on the balance of
accounts receivable

Bal b/f allowance for doubtful debt RM500 ⃰
Bal c/f acc.receivable RM110,000

Estimated uncollectible debt 1% of Acc Rec

Percentage x Balance c/f = Balance c/f
of allowance accounts allowance for
receivable Doubtful Debt
(%)
RM110,000 RM1,100
1%

Example 1: Percentage on the balance of
account receivable

✓thus, adjustment is needed to get the amount of
bad debt expenses.

Allowance for doubtful debt ( AFDD)

Bal c/f Bal b/f 500 ⃰
Bad debts 600
1,100 exp

1,100 1,100

Missing
Figure

Example 1: Percentage on the balance of
account receivable

date details Dr cr
(RM) (RM)
31 Bad debt expenses
Dec. Allowance for Doubtful Debt 600
600

(recording bad debts expense)

Example 2: Percentage on the balance of
account receivable

Bal b/f allowance for doubtful debt RM 1,500 ⃰
Bal c/f account receivable RM110,000
Estimated uncollectible debt 1% of Acc Rec

% Allowance x Bal c/f = bal c/f Allowance
x acc rec For Doubtful Debt

1% RM110,000 = RM1,100

Example 2: Percentage on the balance of account
receivable

Allowance for doubtful debt

Decrease in 400 Bal b/f 1,500 ⃰

AFDD

Bal c/f 1,100

1,500 Missing 1,500
Figure

date Details Dr Cr
(RM) (RM)
31 Allowance for doubtful debt
Dec. Decreasing in allowance for 400 400
doubtful debt

(record the decreasing in AFDD)

PERCENTAGE OF
CREDIT SALES BASIS

Percentage on net credit sales

x =% Allowance Bad Debts
Net credit sales Expense

Value of bad debt expense is calculated
using the above formula.

Net Credit Sales is the amount of total
credit sales less Sales Discount and Sales
return.

Percentage on net credit sales

Bal b/f allowance for doubtful debt RM500

Credit sales RM23,000

Sales discount RM3,000

Estimate that 2% from net credit sales is uncollectible

% Allowance x Net credit sales = Bad Debts
Expense

2% x RM20,000 = RM400

RM23,000 - RM3,000

Percentage on net credit sales

Date Details Dr Cr
(RM) (RM)
31 Bad debt expense
Dec. Allowance for doubtful debt 400
400
(recording bad debt expenses)

Percentage on credit sales

Bal b/f allowance for doubtful debt RM500

Credit sales RM23,000

Sales discount RM3,000

Estimate that 2% from net credit sales is uncollectible

% Allowance x Credit sales = Bad Debts
Expense

2% x RM23,000 = RM460

Percentage on credit sales

Date Details Dr cr
(RM) (RM)
31 Bad debts expense
Dec. Allowance for doubtful debt 460
460
(recording bad debt expenses)

Recovery of Uncollectible Accounts

Bad debt recovery

Amount of debt that is recovered
either in whole or in part after it
has been written off or classified

as bad debt.

Journal entry for bad debt recovery

Date Details Dr Cr
(RM) (RM)
31 Dec. Account receivable
600
Bad debt recovery 600
(Re-establish acc receivable)

Date Details Dr Cr
(RM) (RM)
31 Dec. Cash
600 600
Account receivable
(record the cash receipt)





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