 Hello, in this lecture we will be working a problem concentrating on accounts receivable and allowance for doubtful accounts and be working on the allowance method for writing off accounts receivable. So we're going to have the activity over here. These will be the transactions that we're going to record. We're going to record them in the blue area here in the general journal. And then we also have the trial balance over here and we're going to see the effect on the trial balance. Note the format of the trial balance as we will have the assets of course will be in green. Then we have the liability accounts, the equity accounts and then the income statement, revenue and expenses. We have a very limited amount of accounts so that we can just concentrate basically on the writing off of the accounts receivable but also be able to see the effect on a trial balance in context. We also have the assets here in the account equation equaling the liabilities and the equity of course. We can see that we are in balance down here by saying that the debits of the assets and minus the liabilities adds up to zero. Therefore the debits equal the credits. So note that there's only one column here but we're saying the debits of minus the credits equal zero. That green zero means we're in balance. Net income as of now is just that $378,000. Then we have the general ledger over here. We will post our activity to the general ledger which of course is in the same order as the trial balance, assets in green and then the liability in orange and then the equity in the light blue and then the income statement in the darker blue. Then we have this information down here which will be the accounts receivable subsidiary ledger. So this is going to be similar to the general ledger up here but by contrast instead of recording this information just by date as it will be done in the general ledger we're going to record it by customer down here. So we're going to need to know that in order to be able to account for customers that cannot pay and so these are going to be the customers in names and if we add up all the accounts of by customer then it should sum up here to this $1,000,000 and that ties out to the receivables here and that ties out to the receivables here. At the end of this problem we're also going to take a look at an aging account and this will come into play later on so we'll take a look at that towards the end. Alright so let's take a look at our first transaction which is going to be on $217,000 which says determine that CW company would not pay the amount owed. So we're saying that one of our clients, one of our customers is not going to be able to pay us. We're just going to determine that their account will be uncollectible. So under the allowance method then how are we going to record that? How are we going to adjust for that? Now note that we can see this down here in our ledger. If we go down to our subsidiary ledger here CW owes us this $9,000 that's the individual that is not going to pay us or the company in this case. So we're going to have to write that off. So the question is is cash affected in this case? No we're not going to get cash that's the problem. And so the account that is affected is the receivable. We're saying that receivable there includes $9,000 from CW and it will not be paid. So that needs to go down. We need to go down even though we haven't gotten paid for it because we don't believe we're ever going to get paid for payment for it at this time. So we need to take it off the books. So that has a debit balance we're going to do the opposite thing to it then which in this case would be a credit. So I'm going to copy the receivable right clicking and copying in L6. Put our cursor in C6 and this we're going to paste it here going to right click paste it 123 just the values not the format of the sale values only then we're going into the credit column. We are going to be recognizing credits in this worksheet with a negative. So I'm going to type in negative $9,000 and when we select enter it's going to put brackets around it because of the formatting of the Excel worksheet like so and it also includes of course the comma here to put it in the number format. And we're going to also have a debit for the same amount for $9,000 because we need an equal number of debits and credits and the only question then is what account should we debit and normally of course we would get cash in this situation and we would be debit and cash but we didn't get any cash. So under the direct write off under the allowance method we are going to debit the allowance for doubtful accounts. So notice what we will not be doing is expensing it at this time and under the direct write off method we would be expensing it as bad debt expense at the time it was written off. Now why are we doing this? The idea being that we want to try to match the expense with the revenue and so that means that in the period that we generated the revenue we would like to write off the amount of those revenues that we think are uncollectable in the same time period and in order to do that we're going to have to do an estimate which we'll do at the end of this problem and we'll estimate the bad debt for the time period all at one point in time but when we write off the debt when it becomes uncollectable that's probably going to happen at a later date and so you'll note that if we wrote off the expense now then it wouldn't be matching up with the revenue that helped to generate it. So we're going to use an estimate to try to match that up under the allowance method. So what we have here under the allowance account then is this 40,000 that represents the amount that we believe will be uncollectable so if we think about the receivables then we now have a contra account related to the receivables so the receivables 1,000,002 of the 1,000,002 we think that 40,000 have been estimated to be uncollectable. Now we're going to put that in a second account for a similar reason as a cumulative depreciation is a contra asset account it's a contra asset account meaning it's an asset account with a credit balance you can see that with the brackets so normal asset accounts have a debit balance this is an asset account but it has a credit balance why does it have a credit balance because basically it's kind of like the second half of the receivable account this is the receivable account it's an asset and part of that we kind of broke it in half again the T into you know like a 7 and an R again and this is kind of like the credit half of the T account that we think are going to be uncollectable. Now we're going to put it in a different account for a couple reasons one we don't know who is not going to pay us we just made an estimate based on past experience that of the 1,000,002 40,000 will be uncollectable that's just an estimate that we've made based on past experience and we can't write it off to a particular person a particular customer for example if I scroll over here down to the accounts receivable these are the people that owe us we don't know which one's not going to pay us but we do know from past experience that someone's not going to pass and therefore we're going to estimate that and put that into the allowance account we're also telling our readers hey it's just an estimate people owe us 1,000,002 but we want to be straight up front that based on past experience 40,000 is not going to be paid therefore the 1,000,002 minus the 40 is 1,000,001,60 that's the net receivables at this point in time. Now when someone does not pay us then we're going to say hey we already estimated that we already said made this account saying that these people aren't going to pay us of that 40,009 of it is now has now come to pass now we know who's not going to pay us and we can take it out of the allowance meaning we're going to reduce the allowance and reduce the receivable so basically the allowance has the 40 in it and we are going to debit it making it go down so I'm going to copy that account and put that on top in C5 right click and paste 1,2,3 and obviously it might be easier to think about the allowance by first doing the receivable and then we know that we're going to have to do the opposite to the other account notice there will be no net effect on the net receivables meaning this minus this will be the same because the receivable is going to go down and the allowance that counter account is going to go down by the same amount 9,000 making the balance the same. So let's post this out and see what happens I'm going to make this a little bit smaller down here in the task bar to bring it down to like 80s probably good I'm going to scroll over here so we can see more information and let's post this out so we're going to go to the allowance now it's in the same order here's the allowance third account here's the allowance on the general ledger third account and we have the debit so we're going to be on the debit side of the allowance I'm going to sell C9 I mean S9 we're going to sell S9 we're going to select equals and then point to this 9,000 over here so what's going to happen when we hit enter well that's it this is a credit this is a debit those are opposites the 40,000 is going to go down by 9,000 to 31,000 that of course puts us out of balance here we see the 31,000 here and we're out of balance here and here until we post the other side to accounts receivable so here's accounts receivable we're posting that that's the second account on the trial balance that's the second account on the general ledger we're posting it to the general ledger we're going to be in the credit column so we are in column in the cell P16 so we're in cell P16 equals then we're just going to point to that 9,000 what's going to happen once we hit enter well this is a debit that's a credit it's going to make it go down we're doing the opposite thing to it the receivable goes down to 1,000,191 that's the same number here in M6 and note that we now have affected the receivable account we're also going to have to see what happens by customer so note what we think about when we think through the receivable we often think of you know how much money do people owe us well people owe us 1,000,191 and we estimate that the 31 will not be paid next question who owes us that money the GL doesn't give us that information necessarily because it's an only in order by date so we're going to have to scroll down here to the subsidiary ledger and we're going to look for the individual that's that we think is not going to pay us here's the individual or the company so we're going to put this same information that we have here in the GL down here but in a bit more complex nature in that we're going to have to do it by customer not just by date so in cell t31 we're going to select equals and then point to that 9,000 we're going to post that same information down here so there we have it and then it goes down to zero so we no longer owe or that individual no longer owes us the company no longer owes us because we have written it off and if we add up all the companies that owe us it ties out to 1,000,191 which is the same amount on the receivable which is the same amount up here in the trial balance alright let's see what happens next we have on 412 G company paid a partial payment and went bankrupt it is determined that we will not receive the balance so G company paid us the 20,000 and then we're assuming we're not going to get the balance the difference of 10,000 so the questions we're going to go through is cash affected yes we got money we've got 20,000 so cash is going to go up cash is a debit balance we're going to make it go up by doing the same thing to it which in this case would be another debit I'm going to right-click going to copy the cash going to put that on top right next to the date because the debits traditionally go on top right click paste it 123 the debit will be for cash received of 20,000 so there's our 20,000 I'm going to make it a little bit larger on the taskbar down here to make this a little bit larger I'm going to scroll back over so we can see that a bit more clearly so there's the 20,000 we got in cash now of course we got paid cash and who paid us the cash the customer and they owed us the cash and we're not going to credit revenue of course because we already credited revenue in the past what we're going to do is say people owed us 20,000 represented by the receivable that receivable now needs to go down by the fact that they paid us so I'm going to put that in there now now there's going to be more than two accounts affected but this would be the normal transaction if someone paid us the money for a receivable receivables have a debit balance it needs to go down because they no longer owe us money so I'm going to copy that and I'm going to put that underneath right click and paste it 123 and it's going to be a credit however it's not going to be a credit for 20,000 because they owed us 30,000 if we look at the amount of money that was owed us down here on the subsidiary ledger for G for G 30,000 now we're going to say that they only paid us 20 but they're not going to give us the difference therefore we can't just write it down 20,000 because then we'll still show that they owe us 10 and if we never believe that we are going to receive that we got to just give that up we're not going to we're not going to get it because they went bankrupt so we're gonna have to take it off the books for the entire 30,000 so that means the credit then will be for 30,000 so I'm going to put our cursor in e9 negative 30,000 so there's the credits now of course the debits do not equal the credits we're going to need one more account so the other account is going to be 10,000 because we need 20 plus 10 to get to the 30 I'm going to use our negative sum function I call this the plug function and this type of worksheet to put this in there so instead of selecting equals I'm going to select negative SUM and then sum these up so I'm summing it up but I want it to flip the sign so instead of it being a negative 10 which would some function would be this will be a positive 10 therefore the debits minus the credits will then equal zero in this case so that's what we're gonna put we're gonna need to put some other account there in order to put this in balance also note that this I'm putting the debit on the bottom and I'm under a perfect world we'd have the two debits on top and I'm formatting it so that we have a debit and then a credit and then a debit and that's not as perfectly proper but if it is helping you to build the journal entry to think through it in a way that doesn't have all the debits on top then I would prefer to do that if it's something that will help you think through it and if it's something that you go back to and you have a better audit trail meaning I can look at the journal entry and see what happened then I would break with the rule of having the debits on top and the credits on bottom but just keep that in mind that traditionally we have the debits on top and the credits on bottom I'm just thinking through it in this way and I think that's worth doing so we are then going to see what account we need to put this into we're not gonna get the cash therefore we're gonna debit the