Step 7 - Dealing with adjustments - Accounts Receivables & Bad Debts

Step 7 - Dealing with adjustments - Accounts Receivables & Bad Debts

Net Accounts receivable = Total Accounts Receivale - Bad debts written off

            = 14,800 - 2,500 (to be minus with AR at SOFP)

= 12,300

Allowance for doubtful debts = % x Net Accounts receivable

                    = 2% x 12,300

                    = 246 (SOFP)

	RM
AFDD as at 1 July 2016	0
Less: Bad debt written off	-2,500	(to be minus with AR SOFP) & add Bad debts (SOPL)
Balance	-2,500
Less: New AFDD	246	SOFP
As at 30 June 2017	-2,746	Increase AFDD at SOPL

AFDD - Allowance for Doubtful Debt

To Record: SOPL - AFDD ((14800 - 2500)x 2%) + 2500 = 2,746 (Expense for that period)

SOFP

Accounts receivable = 14,800 - 2,500 = 12,300

AFDD = 246

Additional Notes : Accounts Receivables & Bad Debts

For small and medium sized firm, credit sales really help the owner to manage their cash flow more efficiently and effectively. Literally, the owner could invest the extra cash into any activities that could generate income to them. However, in the real world scenario, credit sales help them to find enough time and funds to pay the amount they owed. Most companies and small and medium sized firm, extend credit to buyers of their goods and service to facilitate sales. This extension of credit has given rise to debtors or accounts receivables. Unfortunately, credit sales increase the risk of bad debts. Bad debts arise when a trade debtor cannot or purposely did not willing to pay the amount owed in respect of goods and services sold on credit. The important fact for the students to understand is treating a debt as bad is a matter of judgment. Every situation is unique and it is up to discretion of the management. Normally, a debt may be irrecoverable because the debtor cannot be traced or the debtor has been declared bankrupt. Bad and Doubtful Debts Bad Debts Amount of debt that is proven to be uncollected in whole or in part. Commonly deducted in the same accounting period in which the credit sales were recognized – follows the matching concept. Doubtful Debts Estimate made of the amount of debtor (at the end of accounting period) that will probably not to be collected (possibility to become bad debts). Not certain who are likely to be bad or how much are likely to be bad. Reason of providing doubtful debts: Business will not overcast profit, or Business will not under cast losses Allowance Method of Accounting for Bad Debts At the end of accounting period, doubtful debts must be created first which is based on the amount of Account Receivables at that date. Then, an adjusting entry is prepared: debit to Bad Debts Account and credit to Allowance for Doubtful Debts Account (Provision for Doubtful Debts Account). Benefits of this method: Records the estimated bad debts as an expense of the period in which the revenue from credit sales was recognised (matching concept). The entry establishes an allowance account that is deducted from account receivable on the balance sheet in order to report account receivable at net realizable value. Net Accounts receivable = Total Accounts Receivale - Bad debts written off = 10300-200 (to be minus with AR SOFP) = 10100 Allowance for doubtful debts = % x Net Accounts receivable = 3% x 10100 = 303 (SOFP)

	RM
AFDD as at 1 July 2016	100
Less: Bad debt written off	-200	(to be minus with AR SOFP) Bad debts (SOPL)
Balance	-100
Less: New AFDD	303	SOFP
As at 30 June 2017	203	Increase AFDD SOPL