Accounts Receivable
Learn to account for credit sales, bad debts, and receivables management. Master the allowance method, direct write-off method, and aging of receivables.
Learn to account for credit sales, bad debts, and receivables management. Master the allowance method, direct write-off method, and aging of receivables.
Key Concepts
Study Tips
- ✓The allowance method is required under GAAP for material amounts
- ✓Bad debt expense is an estimate based on historical data
- ✓Net realizable value = A/R - Allowance for Doubtful Accounts
- ✓When writing off, debit Allowance and credit A/R (no expense!)
Common Mistakes to Avoid
The biggest mistake is recording bad debt expense when writing off a specific account. Under the allowance method, the expense was already estimated. Writing off just moves the balance from A/R to the Allowance account, with no income statement impact.
Related Resources
Accounts Receivable FAQs
Common questions about accounts receivable
The allowance method estimates bad debts at period end before knowing which specific accounts will default. It creates a contra-asset account (Allowance for Doubtful Accounts) that reduces accounts receivable to net realizable value.
The aging method categorizes receivables by how long they've been outstanding (30 days, 60 days, 90+ days, etc.). Older receivables have higher estimated uncollectible percentages, reflecting increased default risk.
First, reverse the write-off entry (debit A/R, credit Allowance). Then record the cash collection normally (debit Cash, credit A/R). This restores the customer's account history.
Net realizable value (NRV) = Accounts Receivable minus Allowance for Doubtful Accounts. It represents the amount the company actually expects to collect from its customers. NRV gives investors and creditors a realistic picture of the receivables' quality rather than showing the gross amount owed, which includes amounts unlikely to be collected.