Unit 2: accounting for receivables introduction

Accounts receivable ___ ___ ___ ___ ___ ___ ___ ___ ___ __ 200, 000
Less: Allowance for doubtful accounts ___ ___ ___ ___ ___ _ 12, 000 188,000
Merchandize inventory ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ 310,000
Prepaid Insurance --------------------------------------------------------------------- 25,000
Total current asset ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ 537, 800



The amount of Br. 188,000 represents the expected cash realizable value of the accounts receivable at the statement date.
(B) Recording the write – off of an Uncollectible Account

Companies use various methods of collecting past – due accounts, such as the sequence of letters, calls and legal action when all means of collecting past due account have been exhausted and collection appears impossible, the account should be written off. To prevent premature write–offs, each write–off should be formally approved in writing by authorized management personnel.

Assume, for example, that the vice president of finance of ABC Company authorizes the write – off of the Br. 500 balance owed by Gemechu CO. on March1, 1997. The entry to record the write-off is:

March1 Allowance for doubtful accounts - - 500

Accounts Receivable – Gemechu CO. - - 500

Bad Debts Expense is not debited when the write-off occurs. Under the allowance method, every bad debts write- off is debited to the allowance account and not to Bad Debts Expense. A debit to Bad Debts Expense would be incorrect, because the expense is recognized when the adjusting entry is made for estimated bad debts.

A writer- off affects only balances sheet accounts. The write-off of the account reduces both Accounts Receivable and the Allowance for Doubtful Accounts. Cash realizable value in the balance sheet, therefore, remains the same as illustrated below.

Before write off After write- off

Accounts receivable 200,000 199,500

Allowance for doubtful accounts 12,000 11,500
Cash realizable value 188,000 188, 000