91Ó°ÊÓ

During the year, credit sales were \(\$ 850,000\) and collections on account were \(\$ 794,000\). The following transactions, among others, occurred during the year: Jan. 11 Wrote off J. Wolf's account, \(\$ 3,000\). Apr. 29 Wrote off B. Avery's account, \(\$ 2,000\). Nov. 15 Received \(\$ 1,000\) from B. Avery to pay a debt that had been written off April 29 . This amount is not included in the \(\$ 794,000\) collections. Dec. 5 Wrote off D. Wright's account, \(\$ 2,250\). 31 In an adjusting entry, recorded the allowance for doubtful accounts at one percent of credit sales for the year. Required a. Prepare journal entries to record the credit sales, the collections on account, the transactions, and the adjustment. b. Show how Accounts Receivable and the Allowance for Doubtful Accounts appear on the December 31 balance sheet.

Step by step solution

01

Record Credit Sales

To record the credit sales for the year, we make the following journal entry: \[\text{Debit Accounts Receivable: } \\(850,000\]\[\text{Credit Sales Revenue: } \\)850,000\]This entry reflects an increase in accounts receivable, representing the amount owed by customers.

02

Record Collections on Account

To record the collections on account, we make the following journal entry: \[\text{Debit Cash: } \\(794,000\]\[\text{Credit Accounts Receivable: } \\)794,000\]This entry reflects the amount of cash collected from customers and reduces the accounts receivable balance.

03

Record Write-offs

For each write-off, we need to reduce accounts receivable and allowance for doubtful accounts.**January 11** - J. Wolf's account (\[\text{Debit Allowance for Doubtful Accounts: } \\(3,000\]\[\text{Credit Accounts Receivable: } \\)3,000\]**April 29** - B. Avery's account \[\text{Debit Allowance for Doubtful Accounts: } \\(2,000\]\[\text{Credit Accounts Receivable: } \\)2,000\]**December 5** - D. Wright's account \[\text{Debit Allowance for Doubtful Accounts: } \\(2,250\]\[\text{Credit Accounts Receivable: } \\)2,250\]These entries remove the uncollectible accounts from accounts receivable and decrease the allowance for doubtful accounts.

04

Reverse Write-Off and Record Received Payment

On November 15, we received payment for a debt that had been previously written off. We need to reverse the write-off and record the receipt. **Reverse previous write-off** \[\text{Debit Accounts Receivable: } \\(1,000\]\[\text{Credit Allowance for Doubtful Accounts: } \\)1,000\]**Record Cash Receipt** \[\text{Debit Cash: } \\(1,000\]\[\text{Credit Accounts Receivable: } \\)1,000\]These entries reinstate the accounts receivable and subsequently clear it with cash payment.

05

Adjust Allowance for Doubtful Accounts

Estimate the allowance for doubtful accounts at 1% of credit sales.\[\text{Credit Sales: } \\(850,000\]\[\text{Allowance for Doubt . Accounts: } \\)850,000 \times 1\% = \\(8,500\]Record the adjusting entry:\[\text{Debit Bad Debt Expense: } \\)8,500\]\[\text{Credit Allowance for Doubtful Accounts: } \$8,500\]This adjusts the allowance for doubtful accounts based on this year's credit sales.

06

Prepare Balance Sheet Presentation

To show how Accounts Receivable and the Allowance for Doubtful Accounts appear on the balance sheet:**Accounts Receivable, net**:\[\text{Accounts Receivable (beginning): } \\(850,000 - \\)794,000 - \\(3,000 - \\)2,000 - \\(2,250 = \\)48,750\]**Less: Allowance for Doubtful Accounts**- Beginning credit allowance: \\(0- Less write-offs: \\)3,000 + \\(2,000 + \\)2,250 = \\(7,250- Plus reversal: \\)1,000- Plus estimated allowance: \\(8,500Net allowance: \((0 - 7250 + 1000 + 8500) = \\)2250\)The net value reported:\[\text{Accounts Receivable, net: } \\(48,750 - \\)2,250 = \$46,500\]

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Credit Sales

When businesses sell goods or services but don't receive immediate payment, it's called credit sales. This is common as it allows customers to purchase now and pay later, improving sales for the business. For bookkeeping purposes, these sales are recorded to track how much customers owe the company, increasing the Accounts Receivable.

For instance, if a business makes \(\(850,000\) in credit sales, this amount is recorded in two ways:

• Debit Accounts Receivable by \(\)850,000\), as this is what customers owe.
• Credit Sales Revenue by the same amount, recognizing the earned revenue.

Recording credit sales helps provide an overview of expected future cash inflows, fundamentally important for financial planning.

Allowance for Doubtful Accounts

The Allowance for Doubtful Accounts is a crucial concept in accounting, used to anticipate potential losses due to uncollectible debts. Businesses cannot always collect all credit sales, so they estimate and adjust their financial records for these potential losses.

To set up this allowance, companies typically rely on past data or a percentage of total credit sales. In the example we're working with, 1% of \(\(850,000\) is estimated as potentially uncollectible, leading to an allowance of \(\)8,500\).

Setting the allowance involves:

• Debiting Bad Debt Expense with \($8,500\) to reflect the expense on the income statement.
• Crediting the Allowance for Doubtful Accounts, increasing the allowance for potential uncollectible amounts.

This approach helps align the income statement with the potential realities of uncollectible debts, providing more accurate financial insights.

Accounts Receivable

Accounts Receivable represents the money owed by customers for credit sales. They are considered current assets on the balance sheet, as businesses typically expect to collect this amount within a year. Keeping track of these receivables is essential.

Throughout the year, receivables increase when credit sales are made and decrease when customers make payments or when accounts are written off due to non-payment. Each transaction affects the balance:

• Record Credit Sales: Increases Accounts Receivable.
• Collections on Account: Decreases Accounts Receivable.
• Write-offs: Also reduces Accounts Receivable because the debt is deemed uncollectible.

For example, if \(\(850,000\) in sales are made but \(\)794,000\) is received, write-offs and adjustments are needed to reflect the true scope of collectible receivables. As shown, the net amount is \($46,500\) after all considerations.

Bad Debt Expense

Bad Debt Expense is an accounting term for the estimated losses from credit sales that will not be collected. It's an inevitable part of doing business on credit, reflecting when a company recognizes that it may not fully collect from all customers.

Bad debt is recorded as an expense on the income statement, affecting net income, but crucially, it adjusts for realistic profitability. It corresponds with entries made to adjust the Allowance for Doubtful Accounts.

• Recording Bad Debt Expense: It involves debiting Bad Debt Expense and crediting the Allowance for Doubtful Accounts.
• Impact: This not only prepares the business for potential losses but also aligns revenue and associated costs within the same period, adhering to the matching principle in accounting.

In the example provided, \($8,500\) is noted as Bad Debt Expense, aligning the financial records with the potential non-collection from credit sales of the same period.