Bad Debts
Amounts owed to a company but will not be collected. It has a 0 balance throughout the Fiscal Period. Balance is reduced to zero at the end of the Fiscal Period
| Year 1 | |
|---|---|
| Net Income | $ 100 000 |
| Less: Bad Debts | 2000 |
| $ 98000 | |
| In this case we recorded that we made 2000 of money will be received. |
Problem
It is impossible to know exactly how the amount of bad debts thee will be as a result, You must estimate the bad debts by using past experience as a guide.
It can be estimated by using a percentage of Net Sales
Allowance for Bad Debts
A contra asset account that reduces Accounts Receivable. Found in the Current Assets section of the balance sheet.
| Current Assets | |||
|---|---|---|---|
| Cash | $12000 | ||
| Accounts Receivable | $53000 | ||
| Less: Allowance for Bad Debts | 2000 | 51000 | |
| $63000 |
Accounts Receivable Age Analysis
| Customer | A/R Balance | Current A/R | 1-30 Days Overdue | 31-60 Days Overdue | 6190 Days Overdue | +90 Days Overdue |
|---|---|---|---|---|---|---|
| 400 | 400 | |||||
| 100 | 50 | 30 | 20 | |||
| 1000 | 1000 | |||||
| 500 | 350 | 150 | ||||
| 300 | 300 | |||||
| 200 | 200 | |||||
| Total | 2500 | 800 | 180 | 2020 | 1000 | 300 |
Estimated Bad Debts
| Age of Accounts Receivable | Amount | Percentage Estimated that will not be collected | Bad Debts Estimate |
|---|---|---|---|
| Current | 800 | 1% | 8 |
| 1-30 Days | 180 | 4% | 7.20 |
| 31-60 Days | 220 | 10% | 22 |
| 61-90 Days | 1000 | 20% | 200 |
| +90 Days | 300 | 50% | 150 |
| Total | 2500 | 387.50 |
Methods for dealing with Estimates
Balance Sheet Method
Must take into consideration any amount that is in the allowance for bad debts accounts already before making the adjustments for Bad Debts
TLDR
Allowance for Bad Debts is Credit = Subtract it Allowance for Bad Debts is Debit = Add it
Allowance for Bad Debts = 500 Credit To Bring Allowance for bad Debts = $3000
| Bad Debts Expense | $2500 | ||
|---|---|---|---|
| Allowance for Bad debts | $2500 |
Income Statement Method
Ignore what is in Allowance For Bad Debts.
Write-Offs
When a company realizes that it will never collect payment from a customer
| Allowance for Bad Debts | $80 | ||
|---|---|---|---|
| A/R | $80 |
What about when they do pay?
Reverse write-off
| A/R | $80 | ||
|---|---|---|---|
| Allowance for Bad Debts | $80 | ||
| AND Record payment |
| Cash | $80 | ||
|---|---|---|---|
| A/R | $80 |