Discuss the valuation of accounts receivable

Assignment Brief

Estimating uncollectible accounts and recording notes

1. Discuss the valuation of accounts receivable
2. Calculate estimated uncollectible accounts under the two allowance methods: the percentage of sales and percentage of receivables methodse
3. Journalize the issuance and receipt transactions related to notes receivable
4. Calculate interest on notes payable using the principle x rate x time formula

This week`s assignment requires the computation of estimated uncollectible accounts using both the percentage of credit sales and the percentage of accounts receivable methods. Use the Week

3 Assignment Template

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Problem 1: Calculating and journalizing uncollectible accounts using the percentage of credit sales method.

Problem 2: Calculating and journalizing uncollectible accounts using the percentage of accounts receivable method and an A/R aging schedule.

Problem 3: Determining maturity date, maturity value and interest on notes. Record the issuance of notes, and receipt (honoring) of notes at maturity.

Sample Answer

Estimating Uncollectible Accounts and Recording Notes

Introduction

In accounting, businesses must record the value of the money they expect to receive from customers. Sometimes, customers are unable to pay their debts, which means a portion of accounts receivable will remain uncollected. To present a realistic financial position, companies estimate and record these potential losses. This process involves calculating uncollectible accounts using recognised methods, valuing accounts receivable accurately, and recording related journal entries. Additionally, businesses handle notes receivable and payable, which involve specific calculations for interest and maturity.

Valuation of Accounts Receivable

Accounts receivable represent the amounts owed to a business by customers for goods or services sold on credit. However, not all receivables are collectible. The valuation of accounts receivable is done at net realisable value (NRV), which is the total receivables minus the estimated uncollectible amount. By applying estimation methods, businesses avoid overstating assets and provide a more accurate financial picture. This valuation aligns with the prudence concept in accounting, ensuring financial statements do not overstate income or assets.

Estimating Uncollectible Accounts

Two common methods are used:

Percentage of Credit Sales Method

This method estimates bad debts as a fixed percentage of total credit sales for a period. The percentage is usually based on past trends. This approach focuses on matching expenses to the revenues they helped generate, making it part of the income statement approach.

Example Calculation:
If annual credit sales are £200,000 and the estimated uncollectible rate is 2%, the bad debt expense is:

£200,000 × 2% = £4,000

Journal Entry:

Dr Bad Debt Expense £4,000                                         Cr Allowance for Doubtful Accounts £4,000

Percentage of Accounts Receivable Method

This method estimates bad debts as a percentage of the ending accounts receivable balance. It focuses on the balance sheet by ensuring receivables are shown at NRV. An ageing schedule can improve accuracy by applying different percentages based on how long debts have been outstanding.

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