Bad Debt Expense

1. Understand the reason for reporting a separate allowance account in connection with accounts receivable.

2. Know that bad debt expenses must be anticipated and recorded in the same period as the related sales revenue to conform to the matching principle.

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3. Prepare the adjusting entry necessary to reduce accounts receivable to net realizable value and recognize the resulting bad debt expense.

Question: Based on the information provided by Dell Inc., companies seem to maintain two separate ledger

accounts in order to report accounts receivables on their balance sheet at net realizable value. One is the sum

of all accounts outstanding and the other is an estimation of the amount within that total which will never be

collected. Interestingly, the first is a fact and the second is an opinion. The two are then combined to arrive at

the net realizable value figure that is shown within the financial statements. Is the amount reported for accounts

receivable actually the net of the total due from customers less the anticipated amount of doubtful accounts?

Answer: Yes, companies maintain two separate T-accounts for accounts receivables but that is solely because

of the uncertainty involved. If the balance to be collected was known, one account would suffice for reporting

purposes. However, that level of certainty is rarely possible.

• An accounts receivable T-account monitors the total due from all of a company’s customers.

• A second account (often called the allowance for doubtful accounts or the allowance for uncollectible

accounts) reflects the estimated amount that will eventually have to be written off as uncollectible.

Whenever a balance sheet is to be produced, these two accounts are netted to arrive at net realizable value, the

figure to be reported for this asset.