Week 8

RECEIVABLES ACCOUNTING SYSTEM

Learning Objectives

1. Writing-off bad debt

2. Estimation for doubtful debt
3. Adjustment into SOCI dan SFP

P3
 Goods can be sold either on cash basis or credit
basis
 The practice of selling on credit, rather than by cash,
is being commonly used to increase the volume of
sales of business, since the purchaser may not have
enough cash to make purchase.
 If cash basis
Dr Bank/Cash
Cr Sales
 If credit basis
Dr Accounts Receivables/Debtor
Cr Sales
 PROS AND CONS OF
EXTENDING CREDIT
Advantage
1.Increases the seller’s revenues.

Disadvantages
1.Bad debt costs.
2.Delayed receipt of cash.

8-3
BAD DEBTS EXPENSES
Possible scenarios concerning a bad debt
eg:
• Financial difficulties
• Overseeing the debt
• Dishonesty
BAD DEBTS EXPENSES
When account receivables or customers
not being able pay the amount they owes to
the business  uncollectible = bad debt

Accounting treatment for bad debt:

• Direct write-off method
WRITE-OFF METHOD
Simpler method
At the date that Account receivables proven to be
bad/uncollectible - Amount cannot be collected is
removed from accounting records
• In SOCI  bad debt = expenses = decrease profit
• In SFP  remove bad debt to reduce asset (AR)
SHOULD ONLY HAVE ONE BAD DEBTS ACCOUNT
Example:
Date Particulars Dr Cr
June 30 Bad debt expenses (SOCI) 500
Accounts receivable (SFP) 500
To record the write off of an uncollectible
account from Jones
DOUBTFUL DEBT EXPENSE
• Through logic, common sense and experience,
there is a possibility that some of existing
Accounts receivables will not be collectible
• Thus, an estimation has to be made
= Doubtful debts
• Charging potential bad debt for the year as
expenses
Reasons
Business will not overstate its profit figure
Business will not understate its losses figure
To present better picture of the state of
affairs of the business
Showing the figure for accounts receivable
which is as close as possible to its true value
at the balance sheet date

CONSERVATISM
DIFFERENCE BETWEEN BAD
DEBTS AND DOUBTFUL DEBTS
BAD DEBTS DOUBTFUL DEBTS

Proven to be bad or Not certain which

uncollectible accounts receivables
are likely to be
uncollectible
Not certain what
amounts are likely to
be uncollectible
HOW TO MAKE ESTIMATION
Several methods to determine amount for
allowance of doubtful debt:
1. Specific identification method
2. Percentage of accounts receivables
method
3. Ageing (aging) of accounts method
4. Percentage based on net credit sales
method
Method 1 : Specific Identification Method

• By going through the individual accounts

receivable, the business may be able to
estimate the amount of doubtful debts by
simply adding up the accounts that the
business judge as most likely to go bad
Eg : Business has the following accounts receivable at the end of
accounting period :

Accounts receivables Amount in RM

Azahari Zain 300
Lee Mei Ling 280
David Matthew 320
Hamidah Salleh 800
Jason Mulu 500
David Quah 700

After reviewing the accounts, the business thinks that Lee Mei
Ling and Jason Mulu may not be able to settle because they have
been owing for a long time and have not made any effort to settle
them
So, the amount of doubtful debts totaling RM780 (RM280+RM500)
Method 2 : Percentage of accounts receivable
method
• Estimated by multiplying the year end total accounts
receivable figure by a certain percentage
• The percentage figure applied is percentage that
deemed to be appropriate or reasonable based on
past experience or what is customary in the type of
business involved to represent the amount that likely
to be uncollectible
Eg : Business has the accounts receivable at the
end of accounting period of RM150,000 and the
estimated percentage is 2%
so it will be likely RM150,000 X 2% = RM3,000
Method 3 : Ageing (Aging) of Accounts
Method
• The business classifies individual accounts receivable
into age groups based on length of time of their debt
have been outstanding
• Eg :
Age group Amount Estimated Percent Estimated Amount
(RM) Uncollectible (%) Uncollectible (RM)
Not yet due 80,000 ½ 400
1-30 days past due 70,000 1 700
31-60 days past due 40,000 2 800
61-90 days past due 30,000 5 1,500
91-120 days past due 20,000 10 2,000
> 120 days past due 10,000 30 3,000
250,000 8,400
Method 4 :
Percentage based on net credit sales method
• The percentage figure applied is percentage of total net
credit sales of a year to represent the amount that likely
to be uncollectible based on past experience
• Eg : Bisnezz Trading has RM1,000,000 net credit sales
for 2013. The business deemed that 1/2% will be
uncollectible, then the estimated doubtful debts
expense will be RM1,000,000 X ½% = RM5,000
PROVISION FOR DOUBTFUL DEBT
Accounting entries are:
Date Particulars Dr Cr
June 30 Doubtful debt expenses (SOCI) 25,500
Provision for doubtful debt (SFP) 25,500

To provide for an allowance for uncollectible

account from sales

Implication: 1. Expenses should be increased by amount that

maybe uncollectible - Profit will be decreased
2. Account Receivable will be reduced, otherwise,
Accounts Receivable will be overstated
Purpose of creating allowance for doubtful debts : Is to show more
correct amount of accounts receivables that will better reflect the
financial position of business
Alternative names for allowance for doubtful debt (page 215)
 SOCI
Revenue XX
Less Cost of Goods Sold XX
Gross Profit XX
Add Other Revenues XX
Less Expenses XX
(Bad debts) XX
(Doubtful debts expense) XX
Net Profit XX

SFP

Current Assets XX
Accounts Receivable XX
Less Provision for doubtful debt XX
Net Accounts Receivable XX
 ADJUSTMENT TO PROVISION
FOR DOUBTFUL DEBT
• Accounts Receivables is likely to be different figure
each year, thus, allowance for doubtful debt is also
likely to change from year to year
• Eg : Hayati Enterprise wants to establish a provision
for doubtful debts based on a percentage of accounts
receivable. On 31 December 2013, the business has
accounts receivable figure of RM100,000 and it
estimates that 1% of accounts receivable will be
bad/uncollectible
• 31/12/2013
Dr. Doubtful Debts (SOCI) RM1,000
Cr. Provision for Doubtful Debts (SFP) RM1,000
 ADJUSTMENT TO PROVISION
FOR DOUBTFUL DEBT
• 2014
• Assume that RM700 of Accounts Receivable were
proven to be bad on 3 January 2014
Dr. Provision for Doubtful Debts RM700
Cr. Accounts Receivable RM700

•The provision for doubtful debts had a credit

balance RM300.
 ADJUSTMENT TO PROVISION
FOR DOUBTFUL DEBT
• 31/12/2014
• Assume that Accounts Receivable on 31 December
2014 was RM120,000 and it wanted to create
provision for doubtful debts based on 1% of the
outstanding Accounts Receivable
• Thus, new provision for doubtful debts amount is
RM1,200
 The provision for doubtful debts had a credit balance
RM300.
 The new provision for doubtful debts is RM1,200
 Note that the amount of RM1,200 is the required
balance for provision for doubtful debts, Not the
amount of doubtful debts expense

Dr. Doubtful Debts (SOCI) RM900

Cr. Provision for Doubtful Debts (SFP) RM900

 The new provision for doubtful debts is RM1,200

 ADJUSTMENT TO PROVISION
FOR DOUBTFUL DEBT
• 2015
• Assume that RM100 of Accounts Receivable were
proven to be bad on 8 January 2015
Dr. Provision for Doubtful Debts RM100
Cr. Accounts Receivable RM100

•The balance provision for doubtful debts is

RM1,100
 ADJUSTMENT TO PROVISION
FOR DOUBTFUL DEBT
• 31/12/2015
• Assume that Accounts Receivable on 31 December
2015 was RM95,000 and it wanted to create provision
for doubtful debts based on 1% of the outstanding
Accounts Receivable
• Thus, provision for doubtful debts is RM950
 The provision for doubtful debts had a credit balance
RM1,100
 The new provision for doubtful debts is RM950
 Note that the new amount for provision is decreasing
 It means the provision has an excess of RM150 =
RM1,100 – RM950

Dr. Provision for Doubtful Debts (SFP) RM150

Cr. Doubtful Debts (SOCI) RM150

• Thus, it is treating doubtful debts expense as revenue

 ADJUSTMENT TO PROVISION
FOR DOUBTFUL DEBT
• 2016
• Assume that RM1,150 of Accounts Receivable were
proven to be bad on 15 February 2016
• Note that the provision for doubtful debts had a balance
of RM950, it means the balance of provision for doubtful
debts is not enough to cover this bad debts. It is short
by RM200.
• 15/2/2016
Dr. Provision for Doubtful Debts RM950
Dr. Bad Debts RM200
Cr. Accounts Receivable RM1,150
 ADJUSTMENT TO PROVISION
FOR DOUBTFUL DEBT
• 31/12/2006
• Assume that Accounts Receivable on 31 December
2016 was RM110,000 and it wanted to create
provision for doubtful debts based on 1% of the
outstanding Accounts Receivable
• Thus, provision for doubtful debts is RM1,100
Dr. Doubtful Debts (SOCI) RM1,100
Cr. Provision for Doubtful Debts (SFP) RM1,100
 BAD DEBTS RECOVERED
• If already written off as bad debts, then suddenly able to recover the debt
1. Directly record the bad debt recovered at the time of receipt of cash/bank
Dr. Cash/bank (SFP)
Cr. Bad debts recovered (SOCI)

OR
2. Reinstate the Accounts Receivable first then record the receipt of payment of the bad
debts
Dr. Accounts Receivable (SFP)
Cr. Bad debts recovered (SOCI)

Dr. Cash/Bank (SFP)

Cr. Accounts Receivable (SFP)

1. Reinstate the debt making the following entries:

• Dr Accounts Receivable’s account
• Cr Bad debts recovered account (Revenue)
2. When the payment is received in settlement of the debt:
 DISCOUNTS ALLOWED
• Discount allowed are cash discounts given to customers by a
business for early payment
• Eg : In a situation where customers are given terms of, say, 1/10,
net 30, it means that if the customer pays his debt within 10 days
from the date of purchase, he gets 1% discount off the invoiced
price involved
• If he does not pay within 10 days from the date of purchase, the
last day to pay the invoice price is 30 days from the date the credit
sale was made
• If a customer purchases goods on credit from a business on 1
January 2013 and the business offer credit terms of 1/10, the
debtor will be able to get a 1% discount if he pays by the 10th of
January 2013
• If he does not want to take the discount, the last day to pay the
invoice price will be the 31st January 2013
DISCOUNTS ALLOWABLE
• On the basis of the conservatism concept, a firm tries to recognize all
possible losses and does not realise profits unless they are actually
earned.
• On the basis of matching concept, the firm may want to make an
estimate of the amount of discount allowed to customers who may
potentially pay within the discount period.
• In such case, the estimate of discount allowable will be treated as an
expense.
Dr. Discount Allowable xxx
Cr. Provision for Discount Allowable xxx
• Eg : Malaysian Memories wants to make provision for discount
allowable for 2% of Accounts Receivable on 31 st December 2013 and
provision for doubtful debts is 1% of RM100,000 of Accounts
Receivable
Dr. Discount Allowable RM 1,980
Cr. Provision for Discount Allowable RM1,980
End of Week 8