 In this presentation, we will record the allowance for Delphi accounts and the bad debt expense for a time period using the allowance method. There are two methods we can use to record the allowance for Delphi accounts and the bad debt expense under the allowance method. So in other words, there's two methods for writing off the bad debt, the allowance method and the direct write off method. We are using the allowance method and now determining what the bad debt expense is or should be as well as the allowance for Delphi accounts with an estimate. There are two methods we could use under the allowance method to calculate this estimate. We could focus on the balance sheet or we could focus on the income statement and they're both relevant to look at. The more common method probably is to focus on the balance sheet and let the income statement kind of fall out where it may. Few different reasons for that one is that we typically often times concentrate on the balance sheet that way and try to tie out all the balance sheet accounts and then let the income statement which will be the other side of the entry, which will be a credit to the allowance and a debit to bad debt expense be what it needs to be and then the income statement will roll over. Part of the reason for this is the income statement will then roll over to the capital account and we'll be able to start over again where the balance sheet is a permanent account. So if we make it correct it should be better in the long run possibly. So that one argument for focusing on the balance sheet method two, if you look at a book problem the balance sheet method is a bit more complicated because we have to break out an aging as we'll do here typically and we also need to consider the fact that we already probably have something in the allowance due to the estimate from the last time period not to be an exact which it never will be and therefore we need some subtraction problem rather than just record in the result we get when doing the calculation. So for that reason allowance methods a bit more complex and therefore more favored for test type questions because there's different questions that we could ask about it but just recognize that the problem on the balance sheet side is that we have these accounts receivable that represents money that is owed to us by customers. We need to know that creditors want to know that number but we recognize that too it could be overstated given the fact that we know that probably some of those customers aren't going to pay us that's just how business works. So we're gonna we can't write off anything directly to the receivable account here because we don't know who's going to pay us but we could probably make an estimate about around how much we think is not going to be paid based on industry standards and that's what we'll talk about now rather than writing down the receivable directly which we can't do because we don't know who's not going to pay us and therefore we can't really track it in the subsidiary ledger down here based on who's not going to pass and we could also tell our reader more by making a contra asset account meaning rather than just netting it out here we could tell our reader this way hey this is how much is actually owed to us this is how much we think is uncollectable it's just an estimate however and if you subtract the two then that will give you the net receivable we exact we actually believe we're gonna get paid. Now we're gonna focus on making this number right this balance sheet side but there is a problem on the the income statement side as well meaning we have this revenue that we generated here and we probably are aware that any revenue we generated on account some percentage of it will be uncollectable and so we also want to record the other side of it which will do as we focus on the balance sheet will focus the other side will be bad debt expense which hopefully will do a good representation of matching up the revenue that will not be collectible in the form of bad debt so we'll match up revenue in the same time period that the bad debt will be expensed and we'll reduce net income in the proper time period by doing that now the the other method the percentage of sales method would focus more on making the income statement correct here we're focusing in and then it would let the it would let the allowance account balance sheet sizes fall and be where it may so we would focus on the income statement the net income being correct and let the balance sheet hopefully work itself out here we're focusing on the balance sheet and hopefully the income statement will kind of work itself out by being the other side of the transaction so let's do that now so for do the if we do the this method what we're gonna do is we're gonna take this accounts receivable one typical way of doing this and break out some type of aging so here's our 1 million 146 3 we're gonna break that out into some type of aging now this is gonna be a bit of an arbitrary breakout I'm just gonna put some numbers in here we would obviously have to if we had software the software would easily be able to break out how past due our debt is so if we say that it's it's within 30 days that's a do I'm just gonna bring out a number 170 1409 1740 and then we're gonna say that it's 30 to 90 days in the due period 141 945 and then 60 I'm sorry 30 to 60 and then 60 to 90 so that's 34389 again I'm just kind of making up these numbers as if you know we ran a report and this is the total accumulation of the accounts receivable that falls into these periods of do-ness within 30 days 30 to 60 days 60 to 90 days and then over 90 days which is I'm gonna say 2 to 9 to 5 and the point is that this should all sum up to the balance that we just looked at on the the subsidiary ledger this needs to be okay and then we're gonna sum this up and sum this up and that gives us our 1 million 146 300 once again if I'm just gonna scroll back over to the trial balance just to show that should be the amount there 1 million 146 300 that's the amount on the general ledger 1 million 146 300 we're basically just breaking up that information rather than just by date but by grouping of past due amounts the reason being is that we're gonna be able to estimate or we're gonna try to estimate that if something's more overdue we're not gonna try to make judgments about particular clients and see if they're not gonna pay us we're gonna try to make judgments based on how past do something is and industry standards to see if what percentage is not gonna get paid based on that so if it's if it's within 30 days we're gonna say that 2% is not gonna get paid where did we come up with that we just based on industry standards and past experience it's an estimate that's our best guess and then on 30 to 60 we're gonna say 4% just an estimate these are not gonna be exact these this is our best guess to try to tell the reader to the financial statements how much of this amount is not gonna be collectible 60 to 90 we're gonna say what 10% notice as we get older it's less likely that we're gonna collect on it because we've been trying to collect on it in this case for 90 days haven't been able to therefore we're gonna say it's very unlikely once it gets to that period that we are not going to collect on it so of these amounts these are the percentages we think are uncollectible if we multiply them out this equals the 917 40 times the 2% this one equals the 171 945 times the 4% and yeah we could of course copy this across the formula and it would work auto-fill it but we're just gonna do the calculations to note what we're doing this is gonna be the 34 389 times the 10% and this is gonna be equal to the 229 26 times the 95% and this of course is summing this up so if we add this this this this adds up to 50,000 for 37 so in essence we're saying this matches our total receivables what is owed to us this is how much of those total receivables we believe is uncollectible 50,000 for 37 now that's gonna be what we're gonna adjust our allowance account to be now if we scroll back over you'd think that would just be it and we can record our journal entry but there's one last step that often messes people up and it often messes people up because we're not given the trial balance when we work these problems so if we were we would say okay there's the 15,300 here's our accounts receivable we've determined that 50,000 for 37 is not collectible so we need to make this account 50,000 for 37 but there's 15,300 in there already why because it's in there from the last time period estimate that wasn't exact it's left over now it's usually going to be a credit because it's usually you know possibly our estimate was higher than was actually uncollectible but if it was a debit then you know we'd have to do an addition problem to do the calculation so in other words our calculation we need to make this number 50,000 for 37 in the credit direction because it needs to be a contra asset the opposite of this number so we need to make it go up in the credit direction we need to credit by the difference 50,000 for 37 minus 15,300 that would be a credit of only the 35,137 to get us to 50,347 now if this were a debit just recognize that that was a debit meaning we underestimated in the prior time period we'd have to get to a 50,433 credit which means we'd have to debit it 15,300 just to get it back to zero we'd have to credit it 15,300 to get it back to zero plus another 50,437 or 65,737 so that's a possible scenario as well ours has a credit balance so we're going to take the 50,437 minus 15,300 that's the amount we're going to be making a journal entry for it's going to be crediting this account and debiting the bad debt expense so let's do that we're going to do that down here we're going to debit bad debt expense we're going to put a cursor on k11 right-click and copy put that here in B 21 right-click and paste 123 going to do that calculation one more time because it's good times we're going to say this equals and we will say the 50,437 we wanted to be minus what's there which is 15,300 gives us that 35,137 we need to have it bring it up then we're going to put the credit which I'm going to use with our negative plug formula which will be negative of that number so there is our credit and that will be going to the allowance for doubtful accounts it has a credit balance we're going to increase it by doing the same thing to it another credit so we're going to copy k7 right-click and copy bring that down put that in B 22 right-click and paste 123 there's our journal entry let's record it out see if it does what we wanted to do what do we want it to do we wanted to make this number what we think it should be 50,437 so first bad debt here it is here it is on the trial balance second to last account it's in order assets liabilities equity income and expense here's it's going to be in the same order on the general ledger over here so here's our assets liabilities equity revenue and expense here's the bad debt expense in z9 we're in z9 z9 equals scrolling back over we're going to pick up that 35 137 bringing the balance up from zero by 35 137 to 35 137 that 35 137 also appearing on the trial balance bringing down net income and taking us out of balance by 35 137 we're then going to record the allowance for doubtful accounts here it is on the journal entry here it is on the trial balance third account on the trial balance and therefore third account on the general ledger we're going to scroll down here we have the open account on s13 s13 we're going to say that equals and scroll back over and scroll back down we're going to pick up that 35 137 credit and enter and that brings the balance from 15,300 up by 35 137 to 50,437 that being what we wanted to be this 50,437 and scroll back over sorry scrolling back and forth a little quickly we're going to scroll back over to the trial balance here so here's the 50,437 there puts us back in balance here so now our allowance for doubtful accounts is the one I mean our accounts receivable is 1 million 146 3 our allowance is what we calculated it to be 50,437 the difference between the due the debit minus the credit 1 million 95 863 represents the net amount that we actually expect to receive this amount of the receivable is supported backed up by the subsidiary ledger this amount is not because it's just an estimate the bad debt expense then falls out to do what it what it to decrease the net income so it's revenue minus the expenses which should align with the matching principle because hopefully this number represents the amount of sales here that we believe to be uncollectible and therefore the difference between the two gives us our net income which we hope is in alignment with the matching principle