Uncollectible Accounts:
Concepts and Approaches
Myrtle Clark,
University of Kentucky
The following exercise helps students understand the accounting concepts associated with accounting for bad debts. It also provides students with material that is useful when they begin to study for their exam.
Student Learning Objectives
- Describe the two approaches to recognition of uncollectible accounts expense:
- Direct write-off.
- Allowance method.
- Explain the timing for recognition of each.
- Identify which approach is an income statement approach and which is a balance sheet approach.
- Give examples of situations that imply a balance sheet measurement or an income statement measurement approach.
- Give examples of situations that provide better balance sheet measures (net realizable value).
- Know which example(s) is (are) based on the matching concept.
- Know which example(s) is (are) consistent with the conceptual framework's definition of income
By thinking through the examples given, the students will see for themselves when and why each approach makes a difference in terms of income statement and/or balance sheet measurement and reporting. They will also be challenged to think in terms of which approach provides for better recognition and measurement of uncollectible accounts.
How to Use the Exercise
- Begin by briefly discussing the two approaches in theoretical terms.
- Pass out copies of the exercise to the students. Sufficient space is provided in the exercise for students to write their answers. Students work on the exercise in small groups.
- Go over the exercise with the class using PowerPoint.
Uncollectible Accounts Concepts Exercise
- What are the two approaches to accounting for uncollectible accounts?
- Which of the two approaches would postpone the recognition of bad debt expense?
- The allowance method of accounting for uncollectible accounts may take an income
statement approach or a balance sheet approach. Determine which of the following is a balance sheet approach. Rank the three approaches in terms of providing a measure of net realizable value (a rank of 1 means that the method is most likely to provide the best measure of net realizable value).
| Information on Which debt Expense is Based |
BS or IS Approach |
Rank for NRV
1 = Best Measure |
| Uncollectible accounts are typically 3% of net credit sales. |
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| Uncollectible accounts are typically 3% of accounts receivable. |
| |
| Uncollectible accounts are typically 4% for accounts over 30 days old and 1% for all other accounts |
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- Which of the above is based on the matching concept?
- Which of the above is most consistent with the conceptual framework definition of income? Why?
- What is the third approach called?
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