Explain the matching principle in relationship to recording Bad Debts Expense. The Accrual system of accounting matches earned revenue with expenses that have been incurred in producing revenue during an accounting period. One expense incurred as a result of sales on credit or on account is a bad debts expense. 2. What is the purpose of the Allowance for Doubtful Accounts? This account is a contra-asset account that accumulates the expected amount of bad debts as of a given date. This account is also a permanent account that is not closed to Income Summary at the end of the year. . What is net realizable value? Net realizable value is the amount of accounts receivable that is expected to be collected. 4. When an account receivable is written off, Bad Debts Expense must be debited. True or False? False. Bad Debts expense is no longer used to write off accounts receivable accounts. Allowance for doubtful accounts will be debited, and the accounts receivable will be credited. 5. Explain why the Allowance for Doubtful Accounts is a contra-asset account. Because it contradicts Accounts Receivable which is an asset.
Allowance for Doubtful account accumulates the expected amount of bad debts as of a given date; it is normal balance is a credit. It is a permanent account that is not closed to Income Summary at the end of the year. 6. Recording Bad Debts Expense is a closing entry. True or false? False. Recording Bad Debts expense is an adjusting entry in the allowance method. 7. The Income statement approach used to estimate bad debts is based in Accounts Receivable in the balance sheet. Accept or Reject? Reject.
It is based on a percentage of the dollar volume of net credit sales on the Income Statement. 8. In which approach is the balance if the Allowance for doubtful Accounts considered when the estimate of bad debts Expense is made? Balance Sheet Approach. The adjustment is based on the aging of accounts receivable at the end of the year. Any existing balance in allowance for Doubtful Accounts must be included in the adjustment to bring allowance up to required amount. 9. Why would a company age its Accounts Receivable?
Because the longer a bill has been due and not paid, the more likely it is that it is not going to be paid. Therefore, one way of estimating the amount of bad debts for the year just past is to look at Accounts Receivable and analyze it according to how many days past due the accounts are. 10. Using the Allowance for doubtful accounts method, what journal entries would be made to write off an account as well as later record the recovery of the accounts receivable. Debit allowance for doubtful accounts, and credit Accounts receivable to write off account.
Then reverses the original write-off by debiting accounts receivable and crediting the allowance for Doubtful Accounts. Then the cash received is debited and the accounts receivable is credited. 11. Why doesn’t net realizable value change when an account is written of in the use of the accounts receivable? Because the allowance for doubtful account decreases when an account is writing off, and accounts receivable decreases by the same amount. Net realizable value is the amount that the company expects to collect and that does not change when an account is write-off. 2. What is the purpose of using a direct write off method? The method of writing off uncollectible when they occur and thus not using the allowance for doubtful accounts. This method does not fulfill the matching principle of accrual accounting. 13. Explain the purpose of the bad debts recovered account. When an account receivable has been written off and is recovered, this account, which is in Other Revenue category, is credited in the direct write-off method if the recovery is in a year following in the write-off.