Prepare and discuss the uses of debtors aging

report.

Explain the inevitability of irrecoverable debts in
most businesses.

Ascertain and discuss the impact of uncollectible
debts.
AC07 Bitter and Sweet
Outline the needs and ways to have control over
accounts receivable.

Money owed by customers from the sale of products &

services
Fabulous Flavours Pte Ltd

Credit may/ may not be offered to its customers as it may
affect sales adversely

Exists for the time period between the selling of the
Purchases Sales / Accounts Receivables inventory/services and the receipt of cash.

An entity must assess at each balance sheet date whether
there is any objective evidence that a financial asset is
Cash & Creditors Normal Debtors Bad Debts impaired.
At point of sales Dr Cr
Accounts Receivable S$XXX
How to Write off Bankrupt Long
Sales Revenue S$XXX
manage? (Being credit sales)
But now outstanding
Repaid some At point of collection
Cash S$XXX
Accounts Receivable S$XXX
(Being payment receipt)

A company must assess the value of its accounts

receivable periodically. Amount probable Doubtful Debt
Receivable

to be uncollectible Expense
Accounts

Onceit is probable that an amount of its receivable is

uncollectible, there will be a need to provide an
allowance for that amount.

Once it is certain that an amount is uncollectible, the Amount certain to Bad Debt
said amount has to be written off. be uncollectible Expense

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Accounts receivable that will likely be uncollectible.
Allowance for Doubtful Debts

Expense associated with estimated uncollectible
accounts receivable.
General Specific

No objective evidence of
Objective evidence of
impairment i.e. age of
impairment i.e. financial
debt
difficulty

Your boss, Mike is very worried that there may be similar cases,

Based on estimates of the expected uncollectible amounts of especially for debts that have been long outstanding. He thinks
debts. Example using: (1) percentage of sales and (2) percentage that there is a need to reflect these outstanding debts in the
of receivable. financial statements.

Contra-asset account.
To record estimated uncollectible debts Dr Cr

Subtracted from the balance of the Accounts Receivable account.
Doubtful Debt Expense S$XXX
Balance Sheet Allowance for Doubtful Debts S$XXX
Accounts Receivable S$XXX (Being record of uncollectible debts)
Less: Allowance for Doubtful Debts (S$XXX)
Net Accounts Receivable S$XXX

when there is an under estimation of uncollectible debts, an On 29 April 2009, you realized that Sweet Delights has yet to
increase amount of allowance will be needed: pay $14,500 that was due in February 2008. There is reason to
To record increase estimated uncollectible debts believe that they will only be able to pay 60% of any
Dr Cr outstanding amounts due to the company, given their poor cash
Doubtful Debt Expense S$XXX flow.
Allowance for Doubtful Debts S$XXX
(Being record of additional uncollectible debts) This is a specific allowance which is allowed under regulations
as there is objective evidence of impairment.

when the uncollectible debts was over provided, a decrease
adjustment to reduce the uncollectible allowance: When it is determined that a customer may not be able to pay
To record decrease in amount of estimated uncollectible debts its debts
Dr Cr Dr Cr
Allowance for Doubtful Debts S$XXX 29 Apr 09 Doubtful Debts Expense S$33,800
Doubtful Debt Expense S$XXX Allowance for Doubtful Debts S$33,800
(Being record of reversal of overprovision of uncollectible debts) (Being allowance for doubtful debts due from
Sweet Delights.)

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When a specific accounts receivable has been identified as

An entity must assess at each balance sheet date whether there uncollectible, you will need to recognise this in the financial
is any objective evidence that a financial asset is impaired. statements.

General allowances/provisions are no longer allowed. It is only
allowed if they are based on past experience, and on the On 5 April, Gummy Gummy has declared bankrupt as the
amount of cash which will be collected. company was heavily in debt and cannot settle its debt with
Fabulous Flavours Pte Ltd
Mike mentioned that any debt that is owing for more than 60
days will need to have its value managed. Dr Cr
5 Apr 09 Bad Debt Expense S$40,000
No Allowance for Doubtful Debts is needed as it is based on Accounts Receivable- Gummy Gummy S$40,000
Mike’ intuition. (To write off uncollectible debts)

Mike asked you to show him a schedule of debts classified by

number of months outstanding.

When a bad debt or part of a bad debt is recovered.
The aging schedule reveals patterns of delinquency and
shows where collection efforts should be concentrated.
On 27 April 2009, one of the clients Deyer Pte Ltd that had gone
The longer accounts are left unpaid, the more likely they
bankrupt earlier managed to make a payment of $2,250 to become uncollectible.
Fabulous Flavours Pte Ltd in respect of the debts written off last
year. Customer Contact 0 – 30 31 – 60 61 – 90 > 90 Total
Dr Cr name number days days days days amount
(S$) (S$) (S$) (S$) (S$)
29 Apr 09 Cash S$2,250
Bad Debt Recovered S$2,250
(Being recovery of bad debts)

Bad debt recovered is an income item to be recorded in the

income statement.

Timing Accounts Financial

Aging Debtors Report as at 30 Apr 2009
affected Statement
Debtors’ 0 - 30 31 - 60 61 - 90 effects
name days days days > 90 days Total
Record estimated End of period in Doubtful Debt Net Income
Gummy doubtful debt which sales are Expense
Gummy S$40,000 S$40,000 adjustments made Assets (i.e.
Allowance for accounts
Sweet
doubtful debt receivable)
Delights S$28,000 S$18,000 S$24,000 S$14,500 S$84,500
Identify & write Throughout the Accounts Net Income
No Effect

off actual period as bad receivable

Paradise S$35,000 S$35,000 doubtful debts debts become Assets (i.e.
Choco known Allowance for accounts
Choco S$4,800 S$4,800 doubtful debt receivable)
Total S$32,800 S$53,000 S$64,000 S$14,500 S$164,300

3


Managers extend credit to increase their sales volume.

However, emphasizing on sales without monitoring
collections will tie up their current assets as accounts
receivable (i.e. no increase in cash balance although
made profits).
Mike feels that there is a need to implement
procedures to minimise uncollectible debts. He will
have to come up with some measures that will help
him manage his accounts receivable & bad debts.
The following can help to minimise bad debts: -

Check customers’ payment history before granting
credit sales.

Prepare aging accounts receivable reports periodically
and contact customers with overdue payments.

Reward both sales and collections personnel for
speedy collections so that they will work as a team.

Sequence of procedures for customers whose
payments are overdue:
Send out delinquency letter informing
customer of past-due status of account
Telephone call to customer
Employs a collection agency
Takes legal action against customer

Companies may use debtors aging report to
manage its accounts receivable.

Once it is probable that an amount of its receivable
is uncollectible, there will be a need to provide an
allowance for that amount.

Once it is certain that an amount is uncollectible,
the said amount has to be written off.

Management of accounts receivable is very
important for the financial health of a company.

Can accounts
Textbooks
receivable be
collected? Spiceland, Sepe and Tomassini; Intermediate Accounting, Third Edition; McGraw-Hill
How to control Irwin; 2004; Chapter 326, Pg 327 – 332.
accounts
receivable? Short, Libby, Libby; Financial Accounting – A global perspective, Fifth Edition; McGraw-
Hill/Irwin; 2007; Chapter 6, Pg 290 – 299.
Maybe not No Way!
Jae K Shim, Joel G. Siegel; Financial Accounting; Second Edition; Mc-Graw Hill;
Accounts 1999;Chapter 9, Pg 173 -180.
Use of aging
Allowance Bad Debts Receivable
report
for doubtful written off
debts John J. Wild: Financial Accounting, information for decisions, Third Edition; McGraw-
Received Hill Irwin; 2005; Chapter 7 Pg 281 – 287.
payments
Websites
Bad debts
recovered Implications on Accounting for bad debts
Specific financial http://www.toolkit.com/small_business_guide/sbg.aspx?nid=P06_2900
provision – General statements? Retrieved on 9 April 2009
Over/under Provision –
Under/over
(not allowed*)

4
Websites (cont’d)

The Allowance Method of Accounting for Bad Debts,

http://ccba.jsu.edu/accounting/BADDEBTS.HTML, Retrieved on 9 April 2009

Accounting for bad debts

www.fccj.cc.fl.us/.../learning_cntr_labs/lc_handouts/business/Accounting%20for%
20Bad%20Debts.doc Retrieved on 9 April 2009

Account receivable Aging report http://dhfs.wisconsin.gov/bfs/pdf/APP/Rec/rec50.pdf

retrieved on 9 April 2009

Accounts Receivable Aging Schedule,

http://www.toolkit.com/small_business_guide/sbg.aspx?nid=P06_4224
retrieved on 9 April 2009

FRS 39 Financial Instruments: Recognition and Measurement,

http://www.asc.gov.sg/frs/attachments/2004/FRS_39_2006.pdf
Retrieved on 9 April 2009