Académique Documents
Professionnel Documents
Culture Documents
Sameer Hussain
www.a4accounting.weebly.com | www.facebook.com/a4accounting.net
Valuation of Accounts Receivable
Chapter # 17
Chapter # 17
VALUATION OF
ACCOUNTS RECEIVABLE
Bad debts
An amount owed by a debtor that is unlikely to be paid is called bad debts or uncollectible. The
full amount should be written off to the income statement of the period or to a provision for bad
debts as soon as it is foreseen.
Doubtful debt
An amount owed to an organization by a debtor that it might well not receive. A provision for
doubtful debts may be created, which may be based on specific debts or on the general
assumptions that a certain percentage of debtors’ amounts are doubtful. As the doubtful debt
becomes a bad debt, it may be written off to the provision for doubtful debts or alternatively
charged to the profit and loss account if there is no provision.
Write off
To reduce to zero a debt that cannot be collected is known as writing off customer’s account.
SOLUTION # 1:
Computation of Bad Debts Expense:
Sales 500,000
Less: Sales returns and allowances (20,000)
Net sales 480,000
Rate of bad debts 5%
Bad debts expense for the period 24,000
SOLUTION # 2:
IQBAL & SONS
GENERAL JOURNAL
FOR THE PERIOD DECEMBER 1997
Date Particulars P/R Debit Credit
1 Accounts receivable 45,000
Sales 45,000
(To record the goods sold on account)
2 Cash 20,000
Accounts receivable 20,000
(To record the cash collected from customer)
3 Allowance for bad debts 1,000
Accounts receivable 1,000
(To record the write off customer’s account)
4 Accounts receivable 800
Advance from customer 800
(To record the advance received from customer)
5 Sales discount 600
Accounts receivable 600
(to record the discount allowed to customer)
AGING RECEIVABLES
A schedule of accounts receivable classified by due dates. An aging schedule is used to estimate
bad-debt expense using the percentage-of-receivables approach. A probability of non-collection
is applied to each total in each age group. The sum is the amount of bad debts on the books.
SOLUTION # 3:
Computation of Bad Debts Expense):
Accounts Rate of Uncollectable
Receivable Uncollectable Amount
Not yet due 20,000 2% 400
1 – 30 days past due 10,000 4% 400
31 – 60 days past due 5,000 20% 1,000
61 – 90 days past due 3,000 30% 900
Over 90 days past due 2,000 50% 1,000
Allowance for bad debts adjusted balance 3,700
Add: Allowance for bad debts unadjusted (1,200)
Bad debts expense for the period 2,500
FAZAL COMPANY
GENERAL JOURNAL
Date Particulars P/R Debit Credit
31 Dec Bad debts expense 2,500
1995 Allowance for bad debts 2,500
(To record the bad debts expense for the period)
31 Dec Expense and revenue summary 2,500
1995 Bad debts expense 2,500
(To close the band debts expense account)
FAZAL COMPANY
BALANCE SHEET
AS ON 31 DECEMBER 1995
Assets Equities
Accounts receivable 40,000
Less: Allowance for bad debts (3,700)
36,300
Practice questions
Question # 1: 2011 Private – UOK
Rafiq & Co. has the following balances on Jan. 1, 2010:
Accounts receivable – Control Rs.450,000
Allowance for bad debts Rs.7,500
During the year company completed the following transactions:
1. Total sales including 60% cash sales of Rs.500,000.
2. Sales discount Rs.10,000.
3. Collected cash from customers Rs.240,000.
4. One of the customer accounts receivable subsidiary ledger showed a credit balance of
Rs.5,000.
REQUIRED
(1) Prepare adjusting journal entries if bad debts estimated @ ½ of 5% of net credit sales.
(2) Prepare partial balance sheet.
receivable and credit balance of Rs.4,625 in allowance for bad debts account.
(1) Total sales Rs.250,000 (including cash sales Rs.117,500).
(2) Sales returns and allowance Rs.15,000.
(3) Sales discount Rs.6,000.
(4) Customer’s account written off Rs.4,000.
(5) Cash collected from customers Rs.175,000 (including Rs.1,800 previously written off).
REQUIRED
(i) Compute allowance for bad debts if estimated at 3% of net credit sales.
(ii) Record the above transactions and also the adjusting entry of bad debts allowance in the
journal.
(iii) Prepare partial balance sheet.
REQUIRED
Prepare entries in General Journal from the above postings.
Altaf
March 30 300
November 16 800
Khalid
December 24 1,600
Saleem
August 19 500 September 18 500
October 4 900
Karim
September 28 400
November 16 800
December 4 2,000
REQUIRED
(1) Prepare a table showing analysis of the above accounts by Age Groups.
(2) Compute the amount for doubtful debt applying the percentage given above.
(3) Give the necessary adjusting entry assuming that the allowance for bad debts account
has a debit balance of Rs.250 before adjustment.