TOPIC 6: ACCOUNTING FOR ASSET

1. TOPIC 6: ACCOUNTING FOR ASSET Current Asset: Debtors / Accounts Receivable

2. Who are Debtors?... Definition A debtor is a person who has an obligation to pay debt to a business resulting from the activities of buying stocks 2 types of debtors: i. Trade Debtors- debtors from sales of stock ii. Debtors – from sales of assets.

3. Receivables… • Accounts receivable are amounts owed by customers on account. • Notes receivable are claims for which formal instruments of credit are issued evidencing the debt. • Other receivables include non-trade receivables such as interest receivable, loans, advances and GST receivable.

4. Debtors: Credit Control i. Credit approval - approve the credit only to the appropriate customer ii. Recording – record a complete credit amount in the individual debtors account, before posting to debtors control account and make a frequent checking. iii. Credit policy – the credit policy must be determined before hand in the credit policy to the debtors.

5. Debtors Credit Limit Total Debt Current Period 30 days 60 days >60 days Ali 5,000 3,000 1,000 1,000 1,000 Ahmed 6000 4,000 2,500 1,500 Abu 4000 3,000 1,500 1,000 500 How to measure the collection of debtors account? This can be done using the ageing report. Refer to the ageing schedule, most probably Abu cannot settle his debt.

6. Accounting for Bad Debt Expense… • Allowance method • Direct write-off method.

7. Methods of Estimating Doubtful Debts when using the Allowance Method… • Percentage of sales – Estimated for expense is based on some measure of sales • Percentage of Receivables – Estimate for expense is based on ending accounts debtor and the existing balance in the allowance account.

8. Dr Bad Debt Expenses Cr Allowance for Doubtful Debts What is the difference between the bad debt and allowance for doubtful debt? - Bad debt is a debt that cannot be collected within the accounting period. • Allowance for doubtful debt is an expected debt that cannot be collected within accounting period. Comply with the concept of: i. Matching ii. Prudence The journal entry to record bad debts expenses:

9. Using the Allowance for BD & Doubtful Debt to write-off Bad Debts Expenses: Example 1: (No Allowance on doubtful debts account:) The information below is about Ainun Enterprise for the year ended 31/12/07. Debtor (before bad debt written off) RM 80,000 Bad Debts written off RM 2,200

10. Dr Cr Bad Debt Expenses 2,200 Debtors 2,200 (being a bad debt written off) Income Statement 2200 Bad Debt Expenses 2200 (posting to Income Statement) Bal b/d 80,000 Bad debts exp. 2,200 Debtors 2,200 Inc. Statement . 2,200 Bal. c/d 77,800 80,000 80,000 2,200 2,200 • Journal Entry: Debtors’ a/cBad debts expenses

11. Operation Expenses : Bad debts 2,200 Current Asset Debtors 77,800 (-) Allow for d/d ( 0) 77,800 • Presentationin Income Statement: Income Statement for the year ended … • Presentation in Balance Sheet: Balance Sheet as at ….

12. Using the Allowance for BD & DD to write-off Bad Debts Expenses: Example 2: (No bad debts written off and Allowance for BD & doubtful debts is created): The information below is about Ainun Enterprise for the year ended 31/12/07. Debtor (before bad debt written off) RM 80,000 Ainun expected that uncollectible debt is 3% from the debtors balance. Workings: Allowance for Bad Debt & Doubtful debt on 31/12/2007 80,000 x 3% = RM 2,400

13. Dr Cr Bad Debt Expenses 2,400 Allowance for BD & DD 2,400 (being an allowance for d/d for the year) Bal c/d 2,400 Bad debts exp. 2,400 All d/d 2,400 IS 2,400 2,400 2,400 • Journal Entry: Allowance for BD & DD a/c Bad debts expenses a/c

14. Operation Expenses : Bad debts 2,400 Current Asset Debtors 80,000 (-) Allow. for d/d ( 2,400) 77,600 • Presentation in Income Statement: Income Statement Presentation in Balance Sheet: Balance Sheet as at….

15. Using the Allowance for BD & DD to write-off Bad Debts Expenses: Example 3: (Decrease in Allowance for BD & DD): The information below is about Ainun Enterprise for the year ended 31/12/07. Debtor (before bad debt written off) RM 80,000 Bad debts written off RM 2,200 Allowance For doubtful debt (1/1/07) RM 2,500 Ainun expected that un-collectible debts is 2% from the debtors balance Workings: Provision for doubtful debt on 31/12/2007 (80,000 – 2,200) x 2% = RM 1,556

16. Dr Cr Allowance for BD & DD 2,200 Debtors 2,200 (being a bad debt written off) Bad debts expenses 1,256 Allowance for BD & DD 1,256 (being a decrease in allowance for doubtful debt) • Journal Entry:

17. Debtors 2,200 Balance b/d 2,500 Balance c/d 1,556 Bad debts expenses 1,256 3,756 3,756 All. For BD DD 1,256 Income Stat. 1256 Bal b/d 80,000 All for BD &DD 2,200 Bal. c/d 77,800 80,000 80,000 Allowance for BD & DD a/c Bad debts expenses a/c Debtor a/c

18. Operation Expenses : Bad debts 1,256 Current Asset Debtors 77,800 (-) All for BD & DD ( 1,556) 76,244 • Presentation in Income Statement: Income Statement Presentation in Balance Sheet: Balance sheet as at 31st Dec 2007

19. Using the Allowance for Doubtful Debt to write-off Bad Debts Expenses: Example 4: (Increase in Allowance for BD & DD): The information below is about Ainun Enterprise for the year ended 31/12/07. Debtor (before bad debt written off) RM 80,000 Bad debts written off RM 2,200 Allowance for BD & DD (1/1/07) RM 2,000 Ainun expected that uncollectible debts is 5% from the debtors balance Workings: Allowance for BD & DD on 31/12/2007 (80,000 – 2,200) x 5% = RM 3,890

20. Dr Cr Allowance for doubtful debt 2,000 Bad Debt Expenses 200 Debtors 2,200 (being a bad debts written off) Bad debts expenses 3,890 Allowance for doubtful debt 3,890 (Being an increased in the Allowance for BD & DD a/c) • Journal Entry:

21. Debtors 2,000 Balance b/d 2,000 Balance c/d 3,890 Bad debts expenses 3,890 5,890 5,890 Debtors 200 Income Stat. 4,090 All for BD & DD 3,890 4,090 4,090 Bal b/d 80,000 All for BD & DD 2,000 Bad debts exp. 200 Bal. c/d 77,800 80,000 80,000 Allowance for BD & DD a/c Bad debts expenses a/c Debtors’ a/c

22. Operation Expenses : Bad debts 4,090 Current Asset Debtors 77,800 (-) All for BD & DD ( 3,890) 73,910 Presentation in Income Statement: Income Statement Presentation in Balance Sheet: Balance sheet as at

23. Using the Allowance for BD & Doubtful Debt to write-off Bad Debts Expenses: Example 5: (Bad debt over Provision): The information below is about Ainun Enterprise for the year ended 31/12/07. Debtor (before bad debt written off) RM 80,000 Bad debts written off RM 800 Allowance For BD & DD (1/1/07) RM 1,650 Ainun expected that un-collectible debts is 1% from the debtors balance Workings: Allowance for BD & DD on 31/12/2007 (80,000 – 800) x 1% = RM 792

24. Dr Cr Allowance for BD & DD 800 Debtors 800 (being a bad debts written off) Allowance for BD & DD 58 Bad debts over provision 58 (Being a bad debt over provision) • Journal Entry:

25. Debtors 800 Balance b/d 1,650 Bad debt over prov. 58 Balance c/d 792 1,650 1,650 Income Stat. 58 All for BD & DD 58 Bal b/d 80,000 All for BD & DD 800 Bal. c/d 79,200 80,000 80,000 • Allowance for BD & DD a/c Bad debts over provision a/c Debtors’ a/c

26. Other Income: Bad debts over provision 58 Current Asset Debtors 79,200 (-) Allowance for BD & DD ( 792) 78,408 • Presentation in Income Statement: Income Statement • Presentation in Balance Sheet: Balance sheet as at….

27. Bad Debt Recovered debt that are considered bad are paid back by customer (debtors) for the full amount or half of the amount Example : On 15/6/2007, one of the customers names Ali had paid back his debt for an amount of RM2,000

28. Journal Entry: Dr Cr Bank 2,000 Ali a/c 2,000 (being a cash received for customers bad debt) Ali a/c 2,000 Bad debt recoverable 2,000 (being a bad debts recoverable) OR Bank 2,000 Bad debts recoverable 2,000 (Being a bad debt recoverable)

29. Next Week… Topic 6: Accounting for Assets Current Asset: Inventories