Problem Solving Survival Guide to accompany Financial Accounting, 8th Edition

OVERVIEW

Receivables are claims that are expected to be collected in cash. Three major types of receivables are usually recognized; they are accounts, notes, and other receivables. Receivables can be (a) held until they are collected, (b) sold before they are collected, or (c) held and never collected. Many businesses grant credit to customers; hence, they have accounts receivable. They know that, when making sales “on account,” a risk exists because some accounts will never be collected. However, the cost of these bad debts is more than offset by the profit from the extra sales made because of the attraction of granting credit. The collections department may make many attempts to collect an account before “writing-off” a bad debtor. Frequently an account is deemed to be uncollectible a year or more after the date of the credit sale. In this chapter, we will discuss the allowance method of accounting for bad debts. The allowance method permits the accountant to estimate the amount of bad debt expense that should be matched with revenues rather than waiting to book expense at the time of an actual write-off.