visual basic barcode generator BOOKKEEPING AND ACCOUNTING in Java

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88 BOOKKEEPING AND ACCOUNTING
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Recording Uncollectible Accounts
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Businesses must expect to sustain some losses from uncollectible ac counts and should therefore show on the balance sheet the net amount of accounts receivable, the amount expected to be collected, rather than the gross amount. The difference between the gross and net amounts repre sents the estimated uncollectible accounts, or bad debts. These expenses are attributed to the year in which the sale is made, though they may be realized at a later date. There are two methods of recording uncollectible accounts, the di rect write-off method and the allowance method. Direct Write-Off Method In small businesses, losses that arise from uncollectible accounts are rec ognized in the accounts in the period in which they become uncollectible. Under this method, when an account is deemed uncollectible, it is writ ten off the books by a debit to the expense account, Bad Debt Expense, and a credit to the individual customer s account and to the controlling account. For example, if Bill Anderson s $300 account receivable, dated May 15, 200X, was deemed uncollectible in January of 20XX, the entry in 20XX would be: Bad Debt Expense 300
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Accounts Receivable, Bill Anderson
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Allowance Method As stated before, one of the fundamentals of accounting is that revenue be matched with expenses in the same year. Under the direct write-off method example above, the loss was not recorded until a year after the revenue had been recognized. The al lowance method does not permit this. The income state ment for each period must include all losses and expens es related to the income earned in that period. Therefore, losses from uncollectible accounts should be deducted in the year in which the sale is made. Since it is impossible to predict which particular accounts will not be collected, an adjusting entry is made, usu ally at the end of the year. For example, assume that in the rst year of operation, a rm has es
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CHAPTER 12: Negotiable Instruments
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timated that $2,000 of accounts receivable will be uncollectible. The ad justing entry would be: Bad Debt Expense Allowance for Bad Debt 2,000
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The credit balance of Allowance for Bad Debt (contra asset) appears on the balance sheet as a deduction from the total amount of Accounts Re ceivable: Accounts Receivable Less: Allowance for Bad Debt $30,000 2,000 $28,000
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The $28,000 will become the estimated realizable value of the ac counts receivable at that date. The bad debt expense will appear as an op erating expense in the income statement.
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Computing Uncollectible Accounts
There are two generally accepted methods of calculating the amount of uncollectible accounts. One method is to use a at percentage of the net sales for the year. The other method takes into consideration the ages of the individual accounts at the end of the scal year. Percentage of Sales Method Under the percentage of sales method, a xed percentage of the total sales on account is taken. For example, if charge sales were $200,000 and ex perience has shown that approximately 1 percent of such sales will be come uncollectible at a future date, the adjusting entry for the bad debt account would be: Bad Debt Expense Allowance for Bad Debt 2,000
2,000
The same amount is used whether or not there is a balance in the Allowance for Bad Debt account. However, if any substantial balance should accumulate in the allowance account, a change in the percentage gure would become appropriate.
90 BOOKKEEPING AND ACCOUNTING
Balance Sheet Method Under the balance sheet method, every account is aged ; that is, each item in the balance is related to the sale date. The further past due the ac count, the more probable it is that the customer is unwilling or unable to pay. A typical analysis is shown below. Age of Account A/R Balance 1 30 days $ 8,000 31 60 days 12,000 61 90 days 6,000 91 180 days 3,000 Over 180 days 920 $29,920 Est. % Uncollectible Amount 1% $ 80 3% 360 5% 300 20% 600 460 50% $1,800
The calculated allowance for uncollectible accounts ($1,800 above) is reconciled at the end of the year with the actual balance in the al lowance account, and an adjusting entry is made. The amount of the ad justing entry must take into consideration the balance of the Allowance for Bad Debt account. The percentage of sales method does not follow this procedure.
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