FA24 - Accounts Receivable - Aging of Receivables Method

Summary

The video script explains the process of setting up an allowance for doubtful accounts using the aging of receivables method, also known as the balance sheet method. It details how to estimate bad debts based on the age of receivables, update the allowance T-account, and make the necessary journal entry to adjust for bad debt expense. The script also clarifies how to disclose accounts receivable net on the balance sheet, emphasizing the difference in steps between this method and the percentage of sales method.

Takeaways

• 📘 The problem discussed in the video can be found on a 'Counting workbook' website, where a PDF can be downloaded for practice.
• 🎥 There are more videos available on the website than those listed on YouTube, including both public and members-only content.
• 🔗 To access members-only videos, viewers are encouraged to join by clicking the 'join' button on the YouTube video player.
• 📚 The video focuses on Problem 5, which involves setting up an allowance for doubtful accounts using the aging of receivables method, also known as the balance sheet method.
• 📉 The aging schedule of accounts receivable is used to estimate the likelihood of collecting payments based on the age of the receivables.
• 💼 Store Company's fiscal year-end data on July 31st, 2024, is provided, including an allowance for doubtful accounts with a debit of $500.
• 📊 The company's sales are divided into cash sales and credit sales, with the total sales amounting to $70,000 and cash sales to $75,000.
• 🔢 The accountant estimates the collectibility of receivables based on their age, with fresh receivables having a 99% chance of collection and older ones having higher risks of being uncollectible.
• 📝 The video explains the process of calculating the ending balance of the allowance for doubtful accounts by adding up the estimated uncollectible amounts for each age category.
• 📋 The adjustment to the allowance for doubtful accounts is prepared by debiting bad debt expense and crediting the allowance, with the exact amount determined by the difference between the current and desired ending balance.
• 📑 The final step is to show how accounts receivable would be disclosed on the balance sheet, which is done by subtracting the allowance from the gross accounts receivable to arrive at the net amount.

Q & A

What is the main topic of the video?

The main topic of the video is the explanation of the aging of receivables method, also known as the balance sheet method, for estimating and setting up an allowance for doubtful accounts in accounting.

Where can the workbook with the problem discussed in the video be downloaded?

The workbook can be downloaded from the website 'Counting workbook calm' by clicking on the PDF link.

What is the difference between public videos and members-only videos on the website?

Public videos are available for everyone on YouTube, whereas members-only videos require joining the website to access.

What is the purpose of setting up an allowance for doubtful accounts?

The purpose of setting up an allowance for doubtful accounts is to account for the fact that some receivables may become uncollectible due to customers being unable to pay.

What does the debit of 500 in the allowance for doubtful accounts represent?

The debit of 500 represents the remaining balance in the allowance for doubtful accounts from the previous year after writing off more than was initially provided for.

How does the aging schedule of accounts receivable help in estimating doubtful accounts?

The aging schedule breaks down accounts receivable by their age, allowing the company's accountant to estimate the likelihood of collection based on the age of each receivable.

What is the estimated bad debt based on the aging schedule provided in the video?

The estimated bad debt is calculated as $30 for receivables aged 0 to 30 days, $50 for 30 to 60 days, $60 for 60 to 90 days, and $160 for receivables over 90 days, totaling $300.

What is the difference between the aging of receivables method and the percentage of sales method in terms of steps taken?

In the aging of receivables method, the steps are to compute a percentage of receivables as they age, update the allowance T-account, then do the journal entry, and finally calculate AR net. In the percentage of sales method, the steps are to calculate a percentage of sales, do the journal entry, and then update the T-account.

What is the journal entry made to adjust the allowance for doubtful accounts based on the aging method?

The journal entry is to debit Bad Debt Expense by $800 and credit the Allowance for Doubtful Accounts by $800.

How is the net accounts receivable disclosed on the balance sheet after the adjustment?

The net accounts receivable is disclosed as the total accounts receivable of $5,000 minus the ending balance of the allowance for doubtful accounts, which is a $300 credit, resulting in a net of $4,700.

What does the video suggest for viewers who find the aging of receivables method easier to understand?

The video suggests that once a viewer has a good understanding of one method, they should be able to understand the other method as well, as the steps are similar but in a different order.