ACCT 211 Notes March 6

ACCT 211 Notes 3/6/17

Matching vs Materiality

oThe matching principle (expense recognition) requires expenses to be reported in

the same accounting period as the sales they helped produce.

oMateriality states that an amount can be ignored if its effect on the financial

statements is unimportant to users’ business decisions.

oThe direct write-off method usually does not best match sales and expenses.

Allowance Method

oAt the end of each period, estimate total bad debts expected to be realized from

that period’s sales.

oTwo advantages to the allowance method

It records estimated bad debts expense in the p…

…

Recording Bad Debts Expense

oTechCom had credit sales of $300,000 during its first year of operations. At the

end of the first year, $20,000 of credit sales remained uncollected. Based on the

experience of similar businesses, TechCom estimated that $1,500 of its accounts

receivable would be uncollectable.

Writing off a Bad Debt (Allowance Method)

oTechCom has determined the J.Kent’s $520 account is uncollectible.

oThe write-off does not affect the total estimated realizable value of accounts

receivable.

Recovering a Bad Debt

oTo help restore credit standing, a customer sometimes volunteers to pay all of part

of the amount owed on an account even after it has been written off.

Estimating Bad Debts Expense

oTwo Methods

Percent of Sales Method

Accounts Receivable Methods

Percent of Accounts Receivable

Aging of Accounts Receivable

Percent of Sales Method

oBad debts expense is computed as follows:

Current period sales x bad debt % = Estimated bad debt expense

Accounts Receivables Method

oCompute the estimated bad debt for the Allowance for Doubtful Accounts

Year-end Accounts Receivable x Bad Debt %

Aging of Receivables Methods

o5 Steps