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Are you back ? This is the second video
for the Allowance method.
I did not lose you on the first one, did I?
This is Tough! We have a Contra-asset
We have Accounts receivable, which is an asset
And the contra-asset, called either
the Allowance for
Doubtful Accounts, Bad Debts, or Uncollectible accounts
We'll just call it the "Allowance ."
So, it is an allowance, and we have set aside
some expenses to put in there so that we would have
Match earlier
when we did the sale and earned the revenue
the future periods
Remember we are in compliance with GAAP
That is why we have to do all this work
So, let's continue
If you recall, I have my two accounts
Accounts Receivable is 600 and the
Allowance has 48
set aside, in case someone defaults
Guess what happens?
Joe Smith
I don't know anyone named that, so it is made up.
He refuses to pay.
I don't know why, but he is not pleased, or he doesn't plan on paying us.]
So we need to write him off.
Take him OUT of the Receivables.
Because he is never going to pay us.
It isn't that he isn't a good person, but he is not
going to pay and we need to write him off.
So the Write off entry
Is on your sheet of paper
Is always a Debit to
the Allowance
because what does the Allowance have?
It has a credit
balance so we want to reduce it
We are going to use it up.
Because we don't want to write off to the Income statement
We don't want to do that.
And a credit to the Accounts Receivable.
We are writing Joe Smith out of the Receivables.
He is not going to be one of the people we expect to pay us.
That is what a WRITE OFF is.
So when we do that, our T-accounts look different, don't they?
See what's happened here.
The Accounts Receivable had a balance of $600
Now Joe is out, so we have an expectation of 590?
The Allowance had 48 in it
That did not belong to any one person.
But a possibility
It was our guess, remember?
8 % of 600?
We don't know if that is right or not, but
it was just a guess.
So now we have USED up part of the Allowance
10 dollars of it, and we have 38
to use on other people
Is that OK?
We have $590
and 38 against it
That is the first step. 590-38, is our Net Accounts Receivable.
(I am doing a bad job on my easel.)
We have an Allowance and the reason we have it.....
There are NO expenses in a write off.
So, earlier we properly matched to the revenue.
Instead of this period.
Now when we "write off," it becomes just a
Balance Sheet move. From contra to asset. No income statement
That is so GREAT!!!
We are just moving it from Balance Sheet account to B/Sheet account.
That is fine with us!
Here is what it looks like again.
We had 600 in Accounts Receivable
less than the 10 in the write-off, so
there is 590 in the Accounts Receivable (with names on them.)
In the Allowance, we have the 48, less the 10 we wrote off.
Now we have only 38 left in the Allowance.
We have the balance between the two of them...
of 590 minus 38 =
which is possible to be collectible.
That is all we expect is going to happen.
What if, at this point,....
After we have the 590 minus the 38,
we are sitting around doing nothing
And then-----all of a sudden
Joe (whom we wrote off) decides to pay us!
He had a change of heart!
He sent in some money!
Well, there are two more entries..
We need to do to fix this good problem.
Right now we have 590- 38
which is, let me see...
Net Accounts Receivable of
552
After recovery
We are going to remember
This acronym, RE and CO
Re- recovery
(I made that up, again.)
and CO- for collection.
Let me see what to show you.
We are IN RECOVERY!!! That is great.
Yay! Recovery!
That is great.
We got some money we did not expect to get.
So let's do what we should do in recovery.
Let's REVERSE
the entry that put us there.
So if you remember from the write off
When we wrote Joe off, what did we do?
We debited the Allowance and credited the Accounts Receivable
I made a mistake in this original YOU TUBE= Note this. Originally, we debited the allowance and credited the accounts receivable.
Now what we need to Reverse is to debit the Accounts receivable to put it back in and credit the Allowance to make it bigger again.
It is a reversal of what we did originally
Then we will act like we collect NORMALLY
We have done that entry a bunch of times. The collection entry
We debit cash and we credit Accounts Receivable
Let's look at the T-accounts.
Now I have the Accounts receivable
T account that I started
with $600
then what is this entry?
The write-off of Joe.
So we had $590.
That is what we had
We had the 590 less the write off of Joe in the Accounts Receivable
and then in the Allowance we had
48 and the write off from the Allowance of 10
Now, reviewing, in the Reversal, we debit the Accounts Receivable
and Credit the Allowance
Then COllect
so I put
a tiny little cash t-account here
We debit cash
and we credit Accounts receivable.
That reverses it and collects it normally.
So it puts Joe back into our good list
And now we collect him through Normal Accounts Receivable collections.
there are a lot of $10's going very everywhere.
Don't they?
You recall, the 10
is a debit to recover
the second 10 is to write off
So I end up with my Accounts Receivable being the same thing
that I had before, 4590.
Over here in the Allowance
Then I have put the 10 back in there
so I have that original $48 in there.
So that $48 is there for Future write-off potentials!
Make sense?
Go try some problems!!! Practice!