AA015 Chapter 7

Program Matrikulasi Satu Tahun Perakaunan

Chapter 7:
Accounting for Receivables

CONTENT

Definition of Accounts Receivable
Valuation of Accounts Receivable
Bad Debts
Accounting for Bad Debts
Recovery of Bad Debts

Presentation of Accounts Receivable on
The Statement of Financial Position.

Definition of Accounts
Receivable

❖ Accounts receivable refers to accounts that a
business has a right to receive cash in the
future from customers for goods sold or for
services performed.

❖ The cash is usually collected within a short
period of time such as 30 or 60 days.

❖ Reported as a current asset on the statement
of financial position.

Example :

Smart Company sells RM40,000 of
merchandise inventory to customer
Encik Rayyan on account on August
8, 2016
From the above example,
Encik Rayyan is classified as debtors
from the date of credit sales.

Bad Debts

❖ Uncollectible accounts expenses or doubtful
accounts expense.

❖ It arises from the failure to collect debts from
some credit customers.

❖ Causes of bad debts:
a. Bankcruptcy
b. Insane debtors
c. The death of the debtor
d. The debtor cannot be traced

❖ Recorded as a bad debts expense under
operating expenses in the Statement of
Comprehensive Income.

Valuing accounts receivable

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

Valuing Accounts Receivable

❖In the Statement of Financial Position,
accounts receivable is recorded at net
realizable value as follows:-

Syarikat ARC

Statement of Financial Position (extracted)

As at 30 June 2015

Accounts Receivable 120,000

Deduct: Allowance for doubtful debts 10,000

Net Realizable 110,000
Value

Valuing Accounts Receivables

❖Bad debts is recorded as an expense on the
Statement of Comprehensive Income
(According to the Expense Recognition
Concept).

❖Increase in Allowance for Doubtful Debts
follows the Expense Recognition Concept

❖Decrease in Allowance for Doubtful Debts
follows the Revenue Recognition Concept.

Methods of Accounting for Bad
Debts

Allowance Direct Write-
Method off Method

Percentage on Accounts
Receivable

Percentage on Net Credit
Sales

DIRECT WRITE-OFF
METHOD

Direct write-off method

When a customer’s account
receivable is determined to
be uncollectible.

Journal entry:-
Writting-off bad debt

Date Details Dr Cr
(RM) (RM)
31st Bad debts expense
Dec. Accounts receivable – XX 5,000
5,000
(Wrote of an uncollectable amount)

Example

Dexter determines that it cannot
collect $9,300 of its accounts
receivable from its customer,
Lester Company.

Journal entry:-
Writting off bad debt

Date Details Dr Cr
(RM) (RM)
31 Bad debts expense
Dec. Accounts Receivable- Lester Co. 9,300
9,300
( to record writing off Lester Co.
Account)

Allowance Method

ACCOUNTS
RECEIVABLE ARE

WRITTEN-OFF

Journal entry:-
Writting-off bad debt

Under Allowance method :

Date Details Dr Cr
(RM) (RM)
31st Allowance for Doubtful Debts
Dec. Accounts receivable – Mr X 5,000
5,000
(Wrote of an uncollectable amount)

Example :

❖At the end of 2016, Reserly Co. has
accounts receivable of RM700,000
and an allowance for doubtful
accounts of RM54,000. The company
learns that its receivable From Hany
Inc. is not collectible, and
management authorizes write-off
RM7,000.

Journal entry:-
Writting off bad debt

Date Details Dr Cr
(RM) (RM)
31 Allowance for Doubtful Debts
Dec. Accounts Receivable- Hany Inc. 7,000 7,000

( to record writing-off Hany Inc.
Account)

Allowance Method

 Estimated uncollectible accounts
becomes Bad Debts on the basis of
i. Percentage on Net Credit Sales
ii. Percentage on Accounts Receivable

 The offset to the expense is a contra
account called Allowance for Doubful
Debts.

 Allowance for Doubtful debts
contradicts with Accounts Receivable
in the Statement of Financial Position
( Net Realizable Value).

19

Allowance Method

PERCENTAGE ON
ACCOUNTS
RECEIVABLE

Percentage on the balance of
accounts receivable method

Percentage x =Closing closing balance
of provision Allowance for
balance
(%) accounts Doubtful Debts
receivable

Example 1: Percentage on the
balance of accounts receivable

Bal b/f allowance for doubtful RM500
debts RM110,000

Bal c/f accounts receivable

Estimated uncollectible debt 1% of Acc Rec

Bal c/f Bal c/f
Accounts Allowance for
receivable Doubtful Debts

x1% RM110,000 = RM1,100

example 1: Percentage on the
balance of accounts receivable

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

Allowance for doubtful debts ( AFDD)

Bal b/f 500

Bal c/f 1,100 Bad debts 600
1,100 expense 1,100

Missing
Figure

Example 1: Percentage on the
balance of accounts receivable

date details Dr cr
(RM) (RM)
31 Bad debts expense
dec. 600
Allowance for Doubtful Debts 600
(recording bad debt expense)

Example 2: Percentage on the
balance of accounts receivable

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

% Provisionx =Bal c/f bal c/f Allowance
x
Accounts For Doubtful Debts

receivable

1% RM110,000 = RM1,100

Example 2: Percentage on the balance
of accounts receivable

Allowance for doubtful debts

Decrease in 400 Bal b/f 1,500
afdd 1,500
1,100 Missing
Bal c/f Figure

1,500

date details Dr Cr
(RM) (RM)
31 Allowance for doubtful debts
Dec. 400
Decrease in Allowance for 400
doubtful debts
(record the decreasing in afdd)

Allowance Method

PERCENTAGE ON NET CREDIT
SALES

Percentage on net credit sales

% provision x Net credit sales = Bad Debts
Expense

Computes bad debts expense as a
percentage of net credit sales.

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

Percentage on net credit sales

Bal b/f allowance for doubtful debts RM500

Credit sales RM23,000

Sales discount RM3,000

Estimate that 2% from net credit sales is uncollectible

% provision 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 debts expense
Dec. 400 400
Allowance for doubtful debts
(recording bad debt expenses)

Percentage on net credit sales

Bal b/f allowance for doubtful debts RM500

Credit sales RM23,000

Sales discount RM3,000

Estimate that 2% from net credit sales is uncollectible

% Provision x Net Credit sales Bad Debts

= expense

2% x RM23,000 = RM460

Percentage on net credit sales

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

Method to write-off doubtful debt

Learned in Writting off
previous Bad Debt
lecture

Direct write-off Allowance
method method

date details Dr Cr
(RM) (RM)
31 Dec. Bad debts
Accounts receivable - XX 1,000 1,000

( To record bad debt)

Writting Off Bad Debt

ALLOWANCE
METHOD

AfDD Acc does AfDD Acc does

not exist exist before

before

No Bal. b/f Bal. b/f
AfDD AfDD available

34

Accounting Bad Debt : Allowance
Method

a. If the provision does not exist ( Bal. b/f AfDD

not available)

Date Details Dr Cr
(RM) (RM)

31 Bad debts Expense x,xxx
Dec. Accounts receivable x,xxx

(To record Bad Debts written off)

Accounting a bad debt- Allowance
Method

b. If the AfDD is not available before- Bad

Debt

Expense adjustment

Date Details Dr Cr
(RM) (RM)
31 Bad debts expense
Dec. Allowance for doubtful debts x,xxx x,xxx

(record adjustment for bad debts
expense)

Recording Bad Debts Expense -
Allowance Method

Example

(Creating the provision in the
current year)

RM

❖ Closing balance for Acc Receivable as at

31 Dec 2014 10,000

❖ Estimated provision from Receivable Balance 1%

Prepare journal entry to record bad debt expense

37

Bad Debts Expense

Allowance For Doubtful Debts

Bal b/f 0

Bal c/f 100 Bad debts 100
100 Expense 100

1% x RM10,000 = RM 100

38

Answer

Date Details Debit Credit
(RM) (RM)
31 Bad Debts Expense
100
Dis. Allowance for Doubtful Debts 100

(To record adjustment for bad
debt expense)

39

Accounting a bad debts - RM
Allowance method
3,650
Example
240,000
- Allowance for doubtful debts on 2,000
1 January 2015 1%

- Closing balance accounts receivable
on 31 December 2015

- Bad debt written off for the year
- Estimated allowance for doubtful debts

on the balance of acc receivable

Prepare a journal entry to record the bad debt written
off and bad debts expense for the year 2015.

Calculation of bad debts
expense

Allowance for doubtful debts

A/c Rec. 2,000 Bal b/f 3,650
750
Bal c/f 2,400 Bad debts
expense 4,400

4,400

240,000 x 1%

Answer

Date Details Dr Cr
(RM) (RM)
31 Allowance for doubtful debts 2,000
Dec. Accounts Receivable
2,000
(To record bad debts written off
from AfDD) Dr Cr
(RM) (RM)
Date Details
750
31 Bad debts expense 750
Dec. Allowance for doubtful debts

(To record the bad debt expense)

Recovery of Bad Debts

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.

The payment received after it
has been designated as

uncollectible.

Journal entry for bad debts
recovery

Date Details Dr Cr
(RM) (RM)
31 Accounts receivable
Dec. 600
Bad debts recovered 600
(Reinstated previously written off
account)

Date Details Dr Cr
(RM) (RM)
31 Cash
Dec. 600 600
Accounts receivable
(Collected cash on account)

Example 1 : bad debts recovery

Perniagaan 3C
Trial Balance ( extracted ) on 1st Jan 2014

Accounts Receivable RM100,000
Allowance for Doubtful Debts RM 900

information on 31st July 2015

Encik Ali has paid RM300 his debt that was already
classified as bad debt previously.
Show the journal entries.

Journal entry of bad debts
recovery

Date Details Dr Cr
(RM) (RM)
31 Accounts Receivable- En.Ali
July. 300
Bad debts recovery 300
(Reinstated previously written off
account)

Date Details Dr Cr
(RM) (RM)
31 Cash
July 300 300
Accounts Receivable- En.Ali
(Collected cash on account)

Exercise 1

Power Land Bhd started his business on 1 January 2000. For the year
2015, opening balance of account receivable is RM120,000 and the
following transactions have occurred:

•On 24th July 2015, the company recognised a debtor, Robert who was
declared bankcrupt and unable to pay his debt RM10,000.
•On 10th August 2015,Rinaf aced loses and could not pay his debt
RM13,000 .
•On 14th October 2015, Robert paid RM5,000 to settle his previous debt.

Due to economic crisis, the company provided 10% on the balance of
account receivable for allowance for doubtful debt next year. Provision is
made since 31st December 2015.

Prepare a journal entry for each transaction.

Answer

Date Details Dr Cr
2015 RM RM
24th July Bad debts expense 10,000
Accounts receivable 10,000
10th Aug
(Wrote off an uncollectible 13,000
14th Oct amount ) 13,000
Bad debts expense
31st Dec 5,000
Accounts receivable
(Wrote off an uncollectible 5,000
amount )
Accounts receivable 5,000 5,000
9,700 9,700
Bad debts recovered
(Reinstated accounts
receivable)
Cash

Accounts receivable
(Record a cash receipt)
Bad debts expense

Allowance for doubtful debts

Closing balance accounts receivable

Accounts receivable

1/1 Bal b/f 120,000 24/7 B.debt 10,000

14/10 B.Debt 5,000 10/8 B.debt 13,000
5,000
recovery 14/10 B.debt
97,000
31/12 Bal c/f

125,000 125,000

97,000 x 10% = RM 9,700

Closing balance pfdd

Calculation of bad debt

Allowance for doubtful debts 0
Bal b/f

Bal c/f 9,700 Bad debt 9,700
expense

9,700 9,700