Describe how accounts receivable arise and how they are accounted for, including use of a subsidiary ledger and an allowance account
Money owed to the firm by the entities on credit by the sale of goods or services are represented as accounts receivable. On a balance sheet of the company, accounts receivable is the funds owed to the company by other entities. Assuming that assets are due in one year account receivables should be classified as current assets. In order journalize an entry after a sale on an account receivable account should be debited and revenue account should be credited. On the trial balance sheet the ending balance for accounts receivable is usually debit.
Two methods are available for companies to measure the net value of accounts receivables. Both methods could be used, since they are not mutually exclusive. It is computed by subtracting an allowance account balance from the balance of accounts receivable account.
The allowance method is the first of two methods, which opens a contra-asset account, called “bad debt provision” or “allowance for doubtful accounts”, that reduce the accounts receivable balance. The amount of the allowance for doubtful accounts could be calculated in two possible ways: to review every debt and estimate if it is doubtful or not; or to provide a fixed percentage of the total debtors. Change in the allowance for doubtful accounts from period to period should be posted to the income statement account of bad debt expense.
The direct write-off is the second available method. Usually, it is simpler to use this method than the first method. The direct write-off allows decreasing accounts receivable with one entry to its net realizable value. The entry should debit a bad debt expense and credit the accounts receivable in the general ledger.