Calculating Bad Debt Expense and Allowance for Doubtful Accounts
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- Опубликовано: 6 сен 2024
- This video highlights the calculations for Bad Debt Expense and Allowance for Doubtful Accounts using the Income Statement Method (Percentage of Sales) and a Balance Sheet Method (Percentage of Accounts Receivable. T-accounts are used to show the effect of each calculation on Allowance for Doubtful Accounts. Examples are given for both a debit and credit starting balance in Allowance for Doubtful Accounts.
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I enjoy how thorough you are. No matter how many views you get, just remember that you have a solid 14.5 k people who appreciate you. Thank you
Stephen Ngo Thank you so much! It really helps to know that people are enjoying the videos and finding them helpful!
@@allkristiningram These videos still helps alot few years later!!
Thanks Matthew!
I've spoken with 2 different professors and didn't get the % of Receivables when there is a DR balance. I watched your 17 minute video and I get it!! Thank you so much. I really appreciate it. My homework is going to be a breeze and I'm not stressing this weeks quiz. Priceless!!
Angie Linza I'm so glad you understand it now! Good luck with your quiz. Thanks for commenting!
6 years later, at 2:30am, exam the morning, just want to say thank your soul!!!
You're welcome! I hope your exam went well!
this video is so helpful i'm literally commenting 7 years from release and it's saving me before me midterm ty :)
I'm so glad you found it helpful.
Okay, I know this is a 2013 video but I wanted you to know that here in 2019, you saved me. Read the entire chapter, practiced the exercises with the solutions manual, and I still didn't get it. They didn't explain the reasoning for the calculations. You were able to break the mental blockage I had, I finally get it now, thank you so much.
You are most welcome. Luckily, accounting is timeless.
I love this. I have discussed this with my professor a hundred times and could never understand the placement in the t-accounts
+Khadijah Smith I'm so glad I could help you with this difficult topic.
This video is great! I’m studying for an accounting exam and you made clear all my doubts about this two methods. Thanks a lot for sharing! 😁
The colour separation really helped me understand the bigger picture of this concept. Thank you so much 🙏🏼
You’re welcome 😊 Glad it was helpful!
I saw this video again for revising a concept for CFA and every time I'll see this, I'll drop in a thank you!
You're welcome again!
my textbook did a horrible job of explaining this, thank you so much for clearing it up for me!! (I'm a BS in accounting student.)
You're very welcome! I'm glad it helped.
You are awesome. I was so confused, but your step by step, detailed information is a breath of fresh air. Thank you
+SLA PapJewelry So glad I could help! Thanks for commenting!
Thx a lot Miss. Kristin, you are one of the best teachers on the youtube. 💙💙💙💙
Accounting is my major and it is a love-hate relationship. I love it, but it is difficult to understand at times. Thank you so much for your videos, you have made accounting understandable to me. Keep it up, you are helping a ton of people!
+sean mayer having passion is the key to being a good accountant. Thanks so much for your comment. I'm so glad I'm able to help you with something that you love.
Your ability to teach is freakishly good..
Thank you!
My first time on this channel as I was looking for help to understand this complicated topic. Thank you for the amazing explanation!
You're welcome! Glad it was helpful!
Thank you for clear instruction. This is very helpful. I was struggling with balance sheet method for calculating bad debt expense, and this helps.
I've been struggling with this topic for a couple of weeks - my instructor has been calling the methods Sales and Receivables and I was so so lost. This video has helped a lot. Thank you!
You're welcome! So glad I could help!
Kristin, I'm so happy that I found you...thank you so much for this video...
Priscila A You're welcome. I'm so glad I've been able to help your understanding of the material!
This video was so helpful. You broke everything down and went step by step making it easy to understand. Thanks!!!
You're welcome! Glad it was helpful.
literal life saver an easy concept such as the t chart was giving me so much trouble . until i watched this video thank you so much
You're welcome. Glad I could help!
Thank You I will ease the test tomorrow of this video.
Can't even tell you how much I appreciated this video as well as the previous! More helpful than my professor!!! Thank you
You're very welcome! Good luck with your class.
Thank you!! Your video made this theory click in my brain. I appreciate this video so much!
You're so welcome! I'm glad it was helpful.
Your explanation is great. I am so thankful for your generosity to offer your time and knowledge and talent as a present to those who need help to understand. thnak you.
You are so welcome! Thank you!
Thank you, breaking it up into balance sheet and income statement is helpful! I have a test coming up wish me luck
Best of luck!
One of the best videos out there. I have been confused for a month and this videos cleared all my confusion!
I'm so glad I could help! Thanks for commenting.
Thank you again for your time and explaining Bad Debt Expense and Allowance for Doubtful Accounts. It is appreciated more than you know. I have one question, if a customer paid their account and the customers account has been written off, how do we make the adjustment? Thank you again for your help.
+Melissa Latulippe If the customer pays a balance that is written off, reverse the entry you made to write off the account. Essentially, you need to restore the account balance before accepting the customer payment. Debit Accounts Receivable and Credit Allowance for Uncollectible Accounts.
+Melissa Latulippe You can see an example here: accountinginfocus.com/financial-accounting/accounts-receivable/direct-write-off-and-allowance-methods-for-dealing-with-bad-debt/
Wow, what a way to explain accounting concepts easily! I have an exam coming up and I will not forget the rent+overdrawn example. Thank you so much for sharing your knowledge!
Glad it was helpful! Best of luck!
i am glad i watched your videos on A/R. simple and well thought out explanations, anybody can understand. i read some comments about other professors or instructors. its all about how you explain it.
+ForodhaHouse I'm so glad you found the videos helpful! Thanks for commenting!
Thank you for the way you explain this adjusting entries 🙌🏼
Glad it was helpful!
Thank you so much! The part that I was confused over got resolved thanks to your lecture!
Your welcome! Glad it helped!
thank you so much! Ive learned more in this one video than I have all semester 🙌🏽
Your welcome! I'm so glad!
Appreciate this. Most explanations focus on the mechanics, but your videos put more effort into understanding and how the accounts and process work.
Thank you for your comment. I want students to really understand the material, not just memorize for a test.
So good and clear~ it is nice to provide an example and tell us the difference between these two method. And now I have got how to make the statements. Thank u so much !
You're welcome!
Excellent explanation. Your explanations are very relatable. Thank you Kristin
Glad it was helpful! Your so welcome.
Thank you for this great example! Made it very clear and easy to follow.
You're very welcome!
Very easy and straight forward teaching. I like it.
Thanks! Glad you enjoyed it.
you’re saving me from failing my accounting test soon 🥺 THANK YOU!!!
Your welcome! Happy to help!
Great video & method to clarify the different methods. One minor criticism is the use of the colour purple on a black background which is difficult to see. Just to clarify, the 2 methods (% of sales & % of A/R) give different results correct? The 20k you mentioned is not the same - ie. in the I/S method the 20k is NOT a balance, while in the B/S method it is a final balance of that account. Thanks.
Odeh Odeh Thank you for your feedback on the purple. I will use a lighter shade in the future.
You are correct in your analysis. When using the income statement method, you are calculating the bad debt expense. This is added to your allowance balance. When using a balance sheet method, you are calculating the new balance in the allowance account. Therefore, you must record the amount of bad debt expense that you would need to add to the current balance in the allowance account to bring the balance to the amount you calculated using the balance sheet method.
Thank you Kristin.Your method has helped me a lot. Greetings from Papua New Guinea
You're welcome. Glad I could help!
Thank you so so much.. I had been struggling to understand this since ages and always ended up skipping this in my exams, not anymore!
You're very welcome!
Fantastic video.. I am surprised that you don't have more subscribers.
I appreciate that!
God bless you and your comforting voice
+ILikeHouseMusik Thank you. I'm so glad you found the video helpful!
You are awesome . Explained beautifully . I got a good grade from just your videos . Thanks !
Thank you! So proud of you for working hard and getting a good grade. Glad I could help.
Dang!! I've been studying and trying to understand this for 2 weeks. I watched this video and the one before this one and I totally get it now. Thank you so much. I really appreciate it.
You're welcome!
Since we are calculating bad debt at the end of an accounting cycle, when you gave the example of the $9,000 debit balance for Allowance of Doubtful Accounts in the last portion of this video, does this mean that this company has miscalculated their bad debt expense of the PRIOR year by $9,000 or would/could this include bad debt that is being realized during this fiscal period as well? For Example: say at the end of the PRIOR fiscal period, they calculate the Allowance to be $7,750. At the end of THIS fiscal period and they have a $9,000 debit balance for their Allowance, they realized (or recorded) bad debt of $16,750 (they used up the $7,750 allowance of the previous fiscal period PLUS and additional $9,000?)through out the fiscal period. So the next fiscal year, they will have $29,000 allowance (overdraft protection). OR could it be bad debt that they have realized since the beginning of this fiscal period and didn't use up any of last fiscal year's allowances? or even a combo of both?
If the allowance account goes into a debit balance, there was not enough bad debt recorded in the prior period. This happened to many companies in 2008-2011 during the financial crisis. In the current period, the company would need to show higher than normal bad debt expense to cover the debit in the allowance account. Essentially, the company would need to put enough into the allowance account to cover the amount it believes will go bad from this year's sales or receivables (depending on if the company is using sales or A/R method) plus enough to cover the debit balance in the allowance account.
Kristin! I am studying for the CMA you are amazing! Thanks so much I am so glad I found you!
Jennifer Nabor Thanks so much for your comment! I'm glad you found the videos helpful. Good luck with the CMA!
Best Lecture for Bad Debt Expenses adjust. Thanks for your Perfect lecture.
Thank you for the very nice comment. I'm so glad I was able to help you understand the topic better.
very easy-understand explanation, thank you very much
Glad it was helpful!
For example I have to solve for upcoming years like so: (refer to attached docx) I used the %of sales method and got $5,400; $6000, & $6,150 for each year (2007,2008 & 2009) But it didn’t look right I feel like it needs more since it’s providing the allowance for DA for Jan 1, 2007.
I would really appreciate your assistance!
Thank you so much for the brilliant explanation. One question though, what would happen if the allowance for doubtful accounts had an initial balance that exceeded the current period Allowance for doubtful accounts? So meaning what would happen if our Allowance for doubtful accounts in the initial question was $22,000, and we calculated the $20,000 for the current period Allowance for DA?
You would need to reduce the Allowance account by debiting allowance and crediting bad debt expense.
Can you move to Florida. Apply at University of Central Florida and teach here because what something as simple as this becomes a mission impossible for these teachers.
Josue rodriguez Get me a job in Florida and I would be there in a heartbeat! It's still cold in Connecticut and we still have a ton of snow!
Come apply at UCF! They pay enormously. My accounting teacher is horrible.
I'd get you a job at UConn if I could! We are desperately in need of professors who can actually teach-- your vidoes are wonderful and are helping me a lot in intermediate, thank you :D
Glad I could help. I'm not that far from UConn.
This example is amazing. Thank very much :) I was looking for that last part for three days. The Allowance account with debit balance. of $9,000 :)
thank you so much for making this topic so easy to understand.. can u clarify that in case Income statement method, in balance sheet, $32000will be deducted from account receivable as allowance of doubtful account, but on the contrary in balance sheet method $20000will be deducted from account receivable as allowance of doubtful account
You will always deduct the value on the allowance account from accounts receivable.
Hi Kristin
I have a doubt
1) Is there any difference between Allownace for doubtful debts and provion for doubtful debts?
2)If we are given a "write-off during the year" in question does it mean "Bad debts during the year".
3)Does "Bad debts during the year " means "Actual bad debts incurred by company during the year"?
4)If there is say "Allowance for doubtful debts" in 2014 i.e $92
Does it denotes ending balance?
5)When will we reduce Allownace for doubtful debts ?
Looking forward to hear from you
1. Yes they are the same.
2. Write-off means actual bad debt accounts.
3. I'm not sure based off what you have. It depends on the language used in your class.
4. Yes.
5. When you write off an actual A/R account that will not be collected.
The video helped me to have a better understanding of this topic. Thanks!
You're welcome! Glad I could help!
Thank you very much Kristin, you are so helpful to me going through the accounting final exams. I watched the other guys (Ininjanotes, khanacademy) but they are just talking too much about other craps rather than go straight to the point that i need like you. Other things that: You make your video too long to write stuff, i mean if you can write faster or cut the process of you writing it would be less boring to watch.
Anway, thanks Kristin.!
Thank you for your comment and feedback. I will work on writing a bit faster in the future. I appreciate you watching and sharing my video!
The best video on this topic out there!
Glad it was helpful!
I would love to see how this plays out as a Landlord with property damages exceeding the security deposit.
Good but with it was faster. Shorten some words like I/S for income statement
Thanks for your comment. I appreciate it.
Thank you so much for your videos and clear explanations Kristin, they are the most helpful ones that I have seen!
hcabrera28 I am so glad you found my videos helpful. Thank you for commenting.
for the percentage of sales method, are we using total revenue (cash sales + credit sales)?, or are we just using credit revenue sales (cause we already have the cash)?
Thank you Kristin i really enjoyed with your method .
please keep going
haitham elsawy Thank you. I'm so glad you found my video helpful.
question, the 200k of account receivable is the ending balance of a/r? so does that mean that to calculate the amount that is going to be uncollectible we have to use the ending balance of A/R?
Hey, great explanation. But, there is one thing that really annoyed me regarding to Allowance method. If in direct write off method we recover the bad debt expense account in income statement as revenue/uncollectible recovery or what ever the account is, why wouldn't we do the same thing in the allowance method.
Every book always explained that we need two entries to recover bad debt which had been written off(when the customer paid the doubtful account which had been written off): 1) Receivables(Dr),Allowance(Cr) , and 2)Cash(Dr),Receivables(Cr).
in my logic, if the Receivables already paid, it means the allowance should be removed too, but these two entries ignore the fact that we already recorded the bad debt expense in the first place. In my opinion, we need one more entry : Allowance(Dr),Retained Earning(Cr) or Bad debt recovery(Cr-Income statement). Because the doubtful account wasn't there anymore when the receivables already paid and we need to recover the retained earning because the expenses didn't really happen.
What do you thing about my case? Please help me to solve this case. Thanks.
+Denny The theory behind the allowance method is that there is some percentage of sales or accounts receivable that will not be collected. These percentages are based on the company's collection history. When an account is written off and later collected, all that means is that particular account is not a bad debt. If history holds true, another account will end up being uncollectable. That is why we restore the balance in the allowance account when we restore the receivable.
According to the matching principle, the bad debt is recorded with the sale. The allowance method allows the company to adhere to the matching principle and write off bad accounts as they occur.
+Kristin Ingram I see! Thanks for your reply, it's really helpful.
+Denny So glad I could help!
You made this very easy to understand!
I'm so glad I could help. Thanks for commenting!
This is the best explanation I've seen. Thanks!
+Sarah Kenney you're welcome. Thanks for the compliment!
hey just found this video. we are studying accounts receivable and allowance for DA. I understand the concept but when you did the balance sheet method, why is the amount for the balance? why are they different? thank you so much
+wenyan li each of the methods will give a different answer. They should not be the same.
thank you a looot!!! i will watch all your videos right now, bcz its so clear to me !! youre great !
You're welcome. Thanks for watching!
Hello Kristin. Greeting :) I have two questions for you. I would appreciate it If you could give me a hand on this... Q1. How come The allowance of uncollectible accounts become a debt balance ? Because the first entry is estimation and the second entry is write off! 2. What will happen If I make a wrong estimation for the allowance - Assume We have estimation (ie. I read in the news paper the client is not doing good) for the first year 10% from AR aging 100000 so the entry will be at Dec 31. DR (Bad debt Expense 10000) CR (Allowance 10000). In the second year the clients pay me the full 10000 What would be my entry to cancel the estimation entry of the first year in the second year? Note. No write off entry has been made because (ie. No bankruptcy) Should I close the allowance in the Retained Earning or Recovery of bad debt or Which Account? Thanks in Advance
If you make an incorrect estimation and you are using a balance sheet method, it will correct itself. If you are using an income statement method, it will not correct itself and you may end up with a very high or very low balance in the account. That's why most companies use one of the balance sheet methods on their annual financial statements.
@@allkristiningram Thank you so much
Thank you madam you are a life saver
You are most welcome!
A little late on the bandwagon here but great video! Thanks a ton.
You're welcome.
mam i have one question why do some teachers pass journal entry like
(i)Bad debt a/c Dr.
To Debtor a/c Cr.
(ii)Further Bad debt a/c Dr.
To Debtor a/c Cr.
(iii) Allowance for Doubtful Account a/c Dr.
To (Bad debt+further bad debt) a/c Cr.
Instead of Doing this
For bad debt
(i) Allowance for doubtful Account a/c Dr.
To Debtor a/c Cr.
For further bad debt
(ii) Allowance for doubtful Account a/c Dr.
To Debtor a/c Cr.
Thanks for the you detailed example. The time you take and your notation style is very helpful. My question is: how do you note the set up of a bad debt account using the allowance method? Is there a tax implication NIBT/NIAT? Am I over thinking this? Thank you, again.
+Elias McClellan From a GAAP perspective, a company is required to use the allowance method. Therefore, the company would be required to note that there is a departure from GAAP if the direct write-off method is used.
There many be a tax implication if the direct write-off method did not approximate GAAP. The company may record additional bad debt expense to make up for the lack of allowance in previous years. This additional bad debt expense would lower NIBT, the provision for income tax, and NIAT.
I hope that response helped. Please feel free to ask further questions.
Kristin Ingram Thank you, again. This is very helpful.
+Elias McClellan You're welcome!
Thank you for this video! Now I will pass my test for sure :D
ragamufdebora I'm so glad I could help you study for your test! Good luck!
soooooooooo Helpful! I have a final tmr and was stressing about this issue.
+Ardalan Aziznia glad I could help. Good luck with your final and thanks for leaving a comment. I appreciate it.
This video was very helpful in your class. Thank you.
+Adrienne Brown You're welcome. Thanks for commenting!
Hi, I don't understand as to why you put the percentage of sales (income sales method) within the T-account and the percentage of credit sales(balance sales) at the end of the T-account. Can you further elaborate? Thank you very much
+Charles Lam The percentage of sales method calculates the amount of bad debt to be recorded. This amount is added to the balance in the allowance account. When you use the percentage of receivables method, you are calculating what the balance in the allowance account should be. That is why it is at the end of the T-account. You must use that balance to calculate the amount of the bad debt that goes into the journal entry.
Very helpful video! My question is regarding the percentage of sales method. If I have a returns and allowance balance regarding credit sales, what would I be doing with this number? Thanks!
+Sarah Tumler typically, you would use net credit sales in the calculation. Therefore, you should subtract returns and allowances and discounts from credit sales.
You explained that so perfectly!! Thank you!
You're so welcome!
Wow, great video! Please continue doing more! You are wonderful.
+Michael Geary Glad you found the video helpful! Thanks for commenting!
Hi Kristin. Thank you for the video. Can you please make one for Notes Receivables with Premiums and Discounts? Thanks!
+Tracey Palmer I'm so glad you found it helpful. I will add that to my list of possible new content.
So why does the Income Statement method calculate the change in the Allowance account and the Balance Sheet method calculate the ending balance of the account?
Why don't both methods just stick to one (either change in allowance account or ending balance of the account)? Is there a logical explanation or is this just the way it works?
***** That is a great question. Because the income statement method uses sales, the result of the calculation is the bad debt expense based off those sales. You cannot calculate the balance of a balance sheet account based off an amount on the income statement. The balance sheet method takes the balance in an account on the balance sheet and uses that balance to calculate the contra asset that links to that account. You can calculate expenses from assets or liabilities, but you cannot calculate assets or liabilities from revenue or expense balances.
Kristin Ingram
Thank you very much for the prompt response, you have clarified it really well.
a. Sold $1,348,000 of merchandise (that had cost $979,400) on credit, terms n/30.
b. Wrote off $19,600 of uncollectible accounts receivable.
c. Received $666,900 cash in payment of accounts receivable.
d. In adjusting the accounts on December 31, the company estimated that 2.50% of accounts receivable will be uncollectible.
What would the bad debt expense be? (This is a homework question i have been working on. applied what i saw on the video and it is still wrong. any help is appreciated)
Geno Fira What is the beginning balance in Accounts receivable? That is missing in the information you provided. If there is a starting balance in A/R, you need to factor that into your balance to figure out the bad debt. You also need to know how much is currently in the allowance account.
What happens if we allocate a higher allowance for bad debt and some of it is actually repaid - or that we dont get to write it off? Bad debt as mentioned in the allowance and expense account is only an estimate as far as I have understood.
+Anumeha Srivastava Bad debt is an estimate. If using the sales method, the balance in the allowance account must be watched carefully. If using the accounts receivable method, it will automatically be corrected in the next period because the allowance is based on the accounts receivable balance. With either method, it is important to always make sure the percentages the company is using are accurate to the best of the company's knowledge. Great question!
Thank you for a such a prompt response Kristin! I might post more questions as I read further and have newer doubts
IN A TRADING ACCOUNT WHICH ANSWER GO TO INCOME STATEMENT (EXPENSES) AND WHICH ONE GOES TO BALANCE SHEET ?
In the journal entry for the allowance method, Allowance for Doubtful Accounts is the balance sheet account.
Question: you say that Bad debts is an expense and we all know that expenses decrease owners equity, why question is why then did you debit bad debts account ? I am confused
Debits increase expenses, which decrease equity. Remember equity is a normal credit balance.
Can you do a journal entry to show how we would show the 20,000 for the end balance in the allowance for doubtful accounts. Like I have a question that ask for the year-end adjusting entries to provide for the write-offs and to bring the balance of the AFDA account to the required balance as at Dec 31. I understand the write off journal entry is Debit to allowance for doubtful accounts and credit accounts receivable and to show the bad debt amount we do a separate journal entry where we debit bad debt expense and credit allowance for doubtful accounts but is there a seperate journal entry to show the ending balance for the allowance for doubtful accounts that I can see in the T-account?
You don't need to do any other entries. The bad debt/allowance entry is the adjusting entry.
Really thank you sooooo much you make me understanding
You're welcome!
video pace is a bit slow... but info is great! i understand the concept better now!
You can always increase the speed if needed.
Thank you! It is a great video. It's clear and easy to understand.
You're welcome!
Many Thanks . It is very helpful vedio. Appericiate your efforts .
Could you tell me , what about the direct write off methd
You can find more information on the direct write-off method here: accountinginfocus.com/financial-accounting/accounts-receivable/direct-write-off-and-allowance-methods-for-dealing-with-bad-debt/
Thaanks a million for this , i legit tried to figure this out for a whole a week and it didn't work
You're welcome. So glad I could help.
Thank you very much for this, I was only able to understand it after your explanation thank you so much.
You're welcome. Thanks for commenting!
hi Kristin: thanks it's great explanation. I am just a bit confused about $8000 . why do we have $20000 in account and $8000 in another? please
+Seerat Raseen They are two difference examples. In the first example, the $20,000 is used because you calculate the amount of bad debt expense for the year when using the percentage of sales method. In the second example, $20,000 is the new balance in allowance for doubtful accounts because we are using the percentage of receivables method. With the percentage of receivables method, you must look to see how much is already in the account and only add enough bad debt expense to bring the balance in allowance for doubtful accounts to the new balance. In this case, there was $12,000 left in allowance for doubtful accounts. We need to get to a $20,000 cr balance so we must record $8,000 bad debt expense to achieve the $20,000 balance.
+Kristin Ingram Thank you very much.
Thank you. Do you reverse the bad debt expense if not used by year end (12/31/xx)?
Question: What happens when i have a write off? how will it affect my allowance for doubtful accounts?
The write off will lower your allowance balance.
amazing, this made so much sense to me and I have my final on Wednesday :) thank you so much!
You're welcome. Good luck!
What happens if my bad debt expense is a negative number when using the 2nd method?
When using the balance sheet method? If it is negative, you have too much in the allowance account. If there is anything in bad debt expense, you can reduce the amount in the account. If not, you would need to record income.
This is beautiful
+lakersrull Thank you!