A receivable represents a company’s claim on the assets of another receivable. Account Receivable: is an amount owed by a customer, who has purchased the company’s product or service. Receivables are recorded at the time of the sale.
Net Realizable Value: the amount of cash that a company expects to collect from its total or gross accounts receivable balance. It is calculated by subtracting from gross receivables the amount that a company does not expect to collect. ALLOWANCE: the amount that a company does not expect to collect is usually called an allowance. Recording BAD DEBT EXPENSE:
Recording a Write-off: regardless of the method used to account for uncollectible receivable, a company must write off a receivable when it is deemed to be uncollectible. Under the direct write off method the company writes off the receivable and records bad debt expense. However under the allowance method the company writes off the receivable and reduces the balance in the allowance account that was created when bad debt expense was recorded. Recording the Recovery of a Write-off :Occasionally, a company will collect a receivable that it had previously written off. **When estimating bad debt expense companies may use one of two difference approaches.** 1) percentage-of-sale approach 2) percentage-of-receivable approach. … Percentage of sale approach: bad debt expense is a function of a company’s sale. It is calculated by multiplying sales for the period by some percentage set by the company. It’s the method that estimates bad debt expense as a percentage of sales. The advantages of this approach are its simplicity and the fact that it results in very good matching. The main disadvantage is that no consideration is given to the results balance in the allowance for bad debts account. It is simply the existing balance plus the current estimate. Percentage of receivables approach: method that estimates bad debt expense as a percentage of receivables. The major advantage...
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