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Accounting Terms Dictionary |
| Principles of Accounting, U.S. GAAP Financial Reporting Guide |
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| Accounting Terms Dictionary |
| Accounts receivable and allowance for doubtful accounts |
| Accounts receivable and allowance for doubtful accounts Accounts receivable --> "Allowance for doubtful accounts" is subtracted from accounts receivable balance --> "Allowance for doubtful accounts" is a contra-asset account --> a contra-asset account is subtracted from an asset account balance [Example 1] 1. Entity A has accounts receivable balances from three customers as follows: Customer 1: $100,000 --> 25 days old Customer 2: $250,000 --> 35 days old Customer 3: $200,000 --> 70 days old 2. Expected bad debts rate --> Aging schedule method --> estimate bad debts based on the aging of balances --> following rates are assumed: 0 - 30 days: 0% 31 - 60 days: 2% 61 - 90 days: 5% over 90 days: 10% 3. Estimated bad debts amount = $250,000 x 2% + $200,000 x 5% = $5,000 + $10,000 = $15,000 4. Journal entry to record bad debts expense |
5. Accounts receivable = $100,000 + $250,000 + $200,000 = $550,000 6. Allowance for doubtful accounts = $15,000 7. Accounts receivable less allowance for doubtful accounts = $550,000 - $15,000 = $535,000 |
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