Accounting and Account Receivable

Fall 2015

1

Fall 2015

1

Case 1: Estimating Bad Debts and Valuing Accounts Receivable Using the Allowance Method

Ketty Alvarado

Dr. Gissel

ACCO 3001- Intermediate Accounting

10/29/2015

Case 1: Estimating Bad Debts and Valuing Accounts Receivable Using the Allowance Method

Ketty Alvarado

Dr. Gissel

ACCO 3001- Intermediate Accounting

10/29/2015

Companies continually estimate their receivables to determine their last collectability. The term receivable, one of a company’s most liquid assets, refers to the amounts due from individuals and entities, that the company expects to be paid in cash in the future (Kieso et al., 350). The Financial Accounting Standard Board (FASB) considers the collectability of receivables a loss contingency, an existing condition or set of circumstances that involves a loss or impairment of an asset to the enterprise. (Baruch et al., 325) There are two ways a company can account for bad debt expense: the direct write-off method and the allowance method. However, when an asset has been impaired and the loss can be reasonably estimated, the allowance method is the most appropriate to solve this situation, following the matching principle of accounting (Kieso et al., 381). The allowance method refers to an uncollectible accounts receivable process that records an estimated of bad debt expense in the same accounting period as the sales are made. When an account is recognized as uncollectible, the company must remove the receivable and record it as an expense because bad debt is considered part of the cost of doing business. There are two different approaches using a composite rate to estimate uncollectible accounts expense. The first is known as the percentage-of-sales, or income statement viewpoint, and the second one is known as the percentage-of-receivables, or balance sheet viewpoint. (Kieso et al., 356). Moreover, companies may also set up an aging method of accounts receivables, which applies a different percentage based on...