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Bad Debts and Profit & Loss Statements

 
 
Mulligan
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      07-29-2003, 06:43 AM
Hi,

Need your help on a basic question on balance sheets and profit and loss
statements.

Suppose a company ABC sells some equipment for USD 10,000 on 60 days credit
on May 1.

In the financial statements of ABC, the amount of USD 10,000 is shown as
Sales in the profit and loss statement and also accounts receivable in the
balance sheet.

It is June 30 and the closing of the quarterly accounts. ABC has not
received the USD 10,000 on its due date due to various reasons.
ABC decides to specify the 10,000 as Bad Debts in the P & L and releases the
financial statements.


A few months later, the buyer decides to pay back the 10,000 that they owed
ABC.

How does ABC record this in the financial statement (especially the P&L).
They have already specified it as Bad Debts in the P&L.
How does ABC show this 'unexpected' income.

Its easy to put this in the Cash Flow statement as Cash in - but how about
the P & L.


Regards



 
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john
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      07-29-2003, 11:48 AM
"Mulligan" <(E-Mail Removed)> wrote in message
news:VHoVa.294$(E-Mail Removed)...
> Hi,
>
> Need your help on a basic question on balance sheets and profit and loss
> statements.
>
> Suppose a company ABC sells some equipment for USD 10,000 on 60 days

credit
> on May 1.
>
> In the financial statements of ABC, the amount of USD 10,000 is shown as
> Sales in the profit and loss statement and also accounts receivable in the
> balance sheet.
>
> It is June 30 and the closing of the quarterly accounts. ABC has not
> received the USD 10,000 on its due date due to various reasons.
> ABC decides to specify the 10,000 as Bad Debts in the P & L and releases

the
> financial statements.
>
>
> A few months later, the buyer decides to pay back the 10,000 that they

owed
> ABC.
>
> How does ABC record this in the financial statement (especially the P&L).
> They have already specified it as Bad Debts in the P&L.
> How does ABC show this 'unexpected' income.
>
> Its easy to put this in the Cash Flow statement as Cash in - but how about
> the P & L.
>
>
> Regards


hint: examine the "allowance for bad debts" account





 
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DGG
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      07-29-2003, 11:55 AM
If the debt was directly written off, that is, no "allowance for bad
debts" contra asset acount is used, the original entry would have
been:

Bad debts expense 10,000
Accts Receivable 10,000


When payment from XYZ is actually received the reversing entry would
be:

Cash 10,000
Bad debts expense 10,000



However, if proper accounting was used and a contra receivable account
was in place, the entry would have been

Allow for bad debts 10,000
Accts Receivable 10,000

When the cash was received the entry would be

Cash 10,000
Allow for bad debts 10,000


Keep in mind that with the allowance for bad debts accounts an
estimate is made each period for bad debts based on the company
history and business judgement. This better "matches" the bad debt to
the period in which is actually occurred.

DGG
"I am not a bigot: I hate everyone, separately, but equally"


On Tue, 29 Jul 2003 06:43:01 GMT, "Mulligan" <(E-Mail Removed)>
wrote:

>Hi,
>
>Need your help on a basic question on balance sheets and profit and loss
>statements.
>
>Suppose a company ABC sells some equipment for USD 10,000 on 60 days credit
>on May 1.
>
>In the financial statements of ABC, the amount of USD 10,000 is shown as
>Sales in the profit and loss statement and also accounts receivable in the
>balance sheet.
>
>It is June 30 and the closing of the quarterly accounts. ABC has not
>received the USD 10,000 on its due date due to various reasons.
>ABC decides to specify the 10,000 as Bad Debts in the P & L and releases the
>financial statements.
>
>
>A few months later, the buyer decides to pay back the 10,000 that they owed
>ABC.
>
>How does ABC record this in the financial statement (especially the P&L).
>They have already specified it as Bad Debts in the P&L.
>How does ABC show this 'unexpected' income.
>
>Its easy to put this in the Cash Flow statement as Cash in - but how about
>the P & L.
>
>
>Regards
>
>


 
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The Prophet, Bubba Hoshimoto
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Posts: n/a
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      07-29-2003, 01:47 PM
If the allowance method allows for better matching, than how does the entry
(debiting allowance, crediting A/R) make any sense? Matching is intended to
match expenses and income, and the entry you've made has no impact on the
income statement. The more appropriate entry would have been to debit bad
debts expense and credit allowance for bad debts, would it not? That's the
point of the allowance - to act as a credit against accounts receivable and
show that not all of it might be collectible.

"DGG" <(E-Mail Removed)> wrote in message
news:(E-Mail Removed)...
> If the debt was directly written off, that is, no "allowance for bad
> debts" contra asset acount is used, the original entry would have
> been:
>
> Bad debts expense 10,000
> Accts Receivable 10,000
>
>
> When payment from XYZ is actually received the reversing entry would
> be:
>
> Cash 10,000
> Bad debts expense 10,000
>
>
>
> However, if proper accounting was used and a contra receivable account
> was in place, the entry would have been
>
> Allow for bad debts 10,000
> Accts Receivable 10,000
>
> When the cash was received the entry would be
>
> Cash 10,000
> Allow for bad debts 10,000
>
>
> Keep in mind that with the allowance for bad debts accounts an
> estimate is made each period for bad debts based on the company
> history and business judgement. This better "matches" the bad debt to
> the period in which is actually occurred.
>
> DGG
> "I am not a bigot: I hate everyone, separately, but equally"
>
>
> On Tue, 29 Jul 2003 06:43:01 GMT, "Mulligan" <(E-Mail Removed)>
> wrote:
>
> >Hi,
> >
> >Need your help on a basic question on balance sheets and profit and loss
> >statements.
> >
> >Suppose a company ABC sells some equipment for USD 10,000 on 60 days

credit
> >on May 1.
> >
> >In the financial statements of ABC, the amount of USD 10,000 is shown as
> >Sales in the profit and loss statement and also accounts receivable in

the
> >balance sheet.
> >
> >It is June 30 and the closing of the quarterly accounts. ABC has not
> >received the USD 10,000 on its due date due to various reasons.
> >ABC decides to specify the 10,000 as Bad Debts in the P & L and releases

the
> >financial statements.
> >
> >
> >A few months later, the buyer decides to pay back the 10,000 that they

owed
> >ABC.
> >
> >How does ABC record this in the financial statement (especially the P&L).
> >They have already specified it as Bad Debts in the P&L.
> >How does ABC show this 'unexpected' income.
> >
> >Its easy to put this in the Cash Flow statement as Cash in - but how

about
> >the P & L.
> >
> >
> >Regards
> >
> >

>



 
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The Prophet, Bubba Hoshimoto
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Posts: n/a
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      07-29-2003, 01:49 PM
See:

http://www.toolkit.cch.com/text/P06_1552.asp

"DGG" <(E-Mail Removed)> wrote in message
news:(E-Mail Removed)...
> If the debt was directly written off, that is, no "allowance for bad
> debts" contra asset acount is used, the original entry would have
> been:
>
> Bad debts expense 10,000
> Accts Receivable 10,000
>
>
> When payment from XYZ is actually received the reversing entry would
> be:
>
> Cash 10,000
> Bad debts expense 10,000
>
>
>
> However, if proper accounting was used and a contra receivable account
> was in place, the entry would have been
>
> Allow for bad debts 10,000
> Accts Receivable 10,000
>
> When the cash was received the entry would be
>
> Cash 10,000
> Allow for bad debts 10,000
>
>
> Keep in mind that with the allowance for bad debts accounts an
> estimate is made each period for bad debts based on the company
> history and business judgement. This better "matches" the bad debt to
> the period in which is actually occurred.
>
> DGG
> "I am not a bigot: I hate everyone, separately, but equally"
>
>
> On Tue, 29 Jul 2003 06:43:01 GMT, "Mulligan" <(E-Mail Removed)>
> wrote:
>
> >Hi,
> >
> >Need your help on a basic question on balance sheets and profit and loss
> >statements.
> >
> >Suppose a company ABC sells some equipment for USD 10,000 on 60 days

credit
> >on May 1.
> >
> >In the financial statements of ABC, the amount of USD 10,000 is shown as
> >Sales in the profit and loss statement and also accounts receivable in

the
> >balance sheet.
> >
> >It is June 30 and the closing of the quarterly accounts. ABC has not
> >received the USD 10,000 on its due date due to various reasons.
> >ABC decides to specify the 10,000 as Bad Debts in the P & L and releases

the
> >financial statements.
> >
> >
> >A few months later, the buyer decides to pay back the 10,000 that they

owed
> >ABC.
> >
> >How does ABC record this in the financial statement (especially the P&L).
> >They have already specified it as Bad Debts in the P&L.
> >How does ABC show this 'unexpected' income.
> >
> >Its easy to put this in the Cash Flow statement as Cash in - but how

about
> >the P & L.
> >
> >
> >Regards
> >
> >

>



 
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JD
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Posts: n/a
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      07-29-2003, 02:43 PM
You obviously have no knowledge of financial accounting. This is not about
the income statement. This is about the balance sheet. Assets = Total
Liability and Equity. Thus the bad debts expense is a liability and AR is an
asset.
What DGG wrote is correct.

"The Prophet, Bubba Hoshimoto" <(E-Mail Removed)> wrote in message
news:(E-Mail Removed)...
> If the allowance method allows for better matching, than how does the

entry
> (debiting allowance, crediting A/R) make any sense? Matching is intended

to
> match expenses and income, and the entry you've made has no impact on the
> income statement. The more appropriate entry would have been to debit bad
> debts expense and credit allowance for bad debts, would it not? That's

the
> point of the allowance - to act as a credit against accounts receivable

and
> show that not all of it might be collectible.
>
> "DGG" <(E-Mail Removed)> wrote in message
> news:(E-Mail Removed)...
> > If the debt was directly written off, that is, no "allowance for bad
> > debts" contra asset acount is used, the original entry would have
> > been:
> >
> > Bad debts expense 10,000
> > Accts Receivable 10,000
> >
> >
> > When payment from XYZ is actually received the reversing entry would
> > be:
> >
> > Cash 10,000
> > Bad debts expense 10,000
> >
> >
> >
> > However, if proper accounting was used and a contra receivable account
> > was in place, the entry would have been
> >
> > Allow for bad debts 10,000
> > Accts Receivable 10,000
> >
> > When the cash was received the entry would be
> >
> > Cash 10,000
> > Allow for bad debts 10,000
> >
> >
> > Keep in mind that with the allowance for bad debts accounts an
> > estimate is made each period for bad debts based on the company
> > history and business judgement. This better "matches" the bad debt to
> > the period in which is actually occurred.
> >
> > DGG
> > "I am not a bigot: I hate everyone, separately, but equally"
> >
> >
> > On Tue, 29 Jul 2003 06:43:01 GMT, "Mulligan" <(E-Mail Removed)>
> > wrote:
> >
> > >Hi,
> > >
> > >Need your help on a basic question on balance sheets and profit and

loss
> > >statements.
> > >
> > >Suppose a company ABC sells some equipment for USD 10,000 on 60 days

> credit
> > >on May 1.
> > >
> > >In the financial statements of ABC, the amount of USD 10,000 is shown

as
> > >Sales in the profit and loss statement and also accounts receivable in

> the
> > >balance sheet.
> > >
> > >It is June 30 and the closing of the quarterly accounts. ABC has not
> > >received the USD 10,000 on its due date due to various reasons.
> > >ABC decides to specify the 10,000 as Bad Debts in the P & L and

releases
> the
> > >financial statements.
> > >
> > >
> > >A few months later, the buyer decides to pay back the 10,000 that they

> owed
> > >ABC.
> > >
> > >How does ABC record this in the financial statement (especially the

P&L).
> > >They have already specified it as Bad Debts in the P&L.
> > >How does ABC show this 'unexpected' income.
> > >
> > >Its easy to put this in the Cash Flow statement as Cash in - but how

> about
> > >the P & L.
> > >
> > >
> > >Regards
> > >
> > >

> >

>
>



 
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JD
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      07-29-2003, 02:46 PM
One thing I forgot to mention. What you do to one side of the balance sheet
must be done to the other. In a manner of speaking.

"The Prophet, Bubba Hoshimoto" <(E-Mail Removed)> wrote in message
news:(E-Mail Removed)...
> If the allowance method allows for better matching, than how does the

entry
> (debiting allowance, crediting A/R) make any sense? Matching is intended

to
> match expenses and income, and the entry you've made has no impact on the
> income statement. The more appropriate entry would have been to debit bad
> debts expense and credit allowance for bad debts, would it not? That's

the
> point of the allowance - to act as a credit against accounts receivable

and
> show that not all of it might be collectible.




 
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The Prophet, Bubba Hoshimoto
Guest
Posts: n/a
Thanked:
 
      07-29-2003, 03:00 PM
You're obviously a bit of a jerk.

"The matching concept focuses on income determination; its goal is to
ensure the recognition of expenses in the period they contribute to the
generation of revenue."

He's the one that mentioned matching. Matching relates to the income
statement.

The way he talked about doing an allowance for bad debts is wrong. There
has to be an income statement impact, to bad debts expense, otherwise it's
meaningless. All he's done is allocate some A/R to the allowance, with the
allowance then showing up as a debit.

"It is also called Allowance for Doubtful Accounts. It is an estimate of
uncollectible customer accounts. It is called a "contra" account because it
is listed with the current assets on the balance sheet although it is a
credit balance account. The account balance is determined through use of the
Historical Method or Over 90 Days Past Due Method."

I think you need to pull your head out of your ass. Unless you're trolling,
in which case I took the bait.

"JD" <(E-Mail Removed)> wrote in message
news:lKvVa.27703$zd4.9605@lakeread02...
> You obviously have no knowledge of financial accounting. This is not about
> the income statement. This is about the balance sheet. Assets = Total
> Liability and Equity. Thus the bad debts expense is a liability and AR is

an
> asset.
> What DGG wrote is correct.
>
> "The Prophet, Bubba Hoshimoto" <(E-Mail Removed)> wrote in message
> news:(E-Mail Removed)...
> > If the allowance method allows for better matching, than how does the

> entry
> > (debiting allowance, crediting A/R) make any sense? Matching is

intended
> to
> > match expenses and income, and the entry you've made has no impact on

the
> > income statement. The more appropriate entry would have been to debit

bad
> > debts expense and credit allowance for bad debts, would it not? That's

> the
> > point of the allowance - to act as a credit against accounts receivable

> and
> > show that not all of it might be collectible.
> >
> > "DGG" <(E-Mail Removed)> wrote in message
> > news:(E-Mail Removed)...
> > > If the debt was directly written off, that is, no "allowance for bad
> > > debts" contra asset acount is used, the original entry would have
> > > been:
> > >
> > > Bad debts expense 10,000
> > > Accts Receivable 10,000
> > >
> > >
> > > When payment from XYZ is actually received the reversing entry would
> > > be:
> > >
> > > Cash 10,000
> > > Bad debts expense 10,000
> > >
> > >
> > >
> > > However, if proper accounting was used and a contra receivable account
> > > was in place, the entry would have been
> > >
> > > Allow for bad debts 10,000
> > > Accts Receivable 10,000
> > >
> > > When the cash was received the entry would be
> > >
> > > Cash 10,000
> > > Allow for bad debts 10,000
> > >
> > >
> > > Keep in mind that with the allowance for bad debts accounts an
> > > estimate is made each period for bad debts based on the company
> > > history and business judgement. This better "matches" the bad debt to
> > > the period in which is actually occurred.
> > >
> > > DGG
> > > "I am not a bigot: I hate everyone, separately, but equally"
> > >
> > >
> > > On Tue, 29 Jul 2003 06:43:01 GMT, "Mulligan" <(E-Mail Removed)>
> > > wrote:
> > >
> > > >Hi,
> > > >
> > > >Need your help on a basic question on balance sheets and profit and

> loss
> > > >statements.
> > > >
> > > >Suppose a company ABC sells some equipment for USD 10,000 on 60 days

> > credit
> > > >on May 1.
> > > >
> > > >In the financial statements of ABC, the amount of USD 10,000 is shown

> as
> > > >Sales in the profit and loss statement and also accounts receivable

in
> > the
> > > >balance sheet.
> > > >
> > > >It is June 30 and the closing of the quarterly accounts. ABC has not
> > > >received the USD 10,000 on its due date due to various reasons.
> > > >ABC decides to specify the 10,000 as Bad Debts in the P & L and

> releases
> > the
> > > >financial statements.
> > > >
> > > >
> > > >A few months later, the buyer decides to pay back the 10,000 that

they
> > owed
> > > >ABC.
> > > >
> > > >How does ABC record this in the financial statement (especially the

> P&L).
> > > >They have already specified it as Bad Debts in the P&L.
> > > >How does ABC show this 'unexpected' income.
> > > >
> > > >Its easy to put this in the Cash Flow statement as Cash in - but how

> > about
> > > >the P & L.
> > > >
> > > >
> > > >Regards
> > > >
> > > >
> > >

> >
> >

>
>




 
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John
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      07-29-2003, 04:59 PM

DGG (generic guy) is correct, he just did not show the original entry
creating the allowance account which impacts the income statement.


"The Prophet, Bubba Hoshimoto" <(E-Mail Removed)> wrote in message
> If the allowance method allows for better matching, than how does the

entry
> (debiting allowance, crediting A/R) make any sense? Matching is intended

to
> match expenses and income, and the entry you've made has no impact on the
> income statement. The more appropriate entry would have been to debit bad
> debts expense and credit allowance for bad debts, would it not? That's

the
> point of the allowance - to act as a credit against accounts receivable

and
> show that not all of it might be collectible.




"DGG" <(E-Mail Removed)> wrote in message
news:(E-Mail Removed)...
> If the debt was directly written off, that is, no "allowance for bad
> debts" contra asset acount is used, the original entry would have
> been:
>
> Bad debts expense 10,000
> Accts Receivable 10,000
>
>
> When payment from XYZ is actually received the reversing entry would
> be:
>
> Cash 10,000
> Bad debts expense 10,000
>
>
>
> However, if proper accounting was used and a contra receivable account
> was in place, the entry would have been
>
> Allow for bad debts 10,000
> Accts Receivable 10,000
>
> When the cash was received the entry would be
>
> Cash 10,000
> Allow for bad debts 10,000
>
>
> Keep in mind that with the allowance for bad debts accounts an
> estimate is made each period for bad debts based on the company
> history and business judgement. This better "matches" the bad debt to
> the period in which is actually occurred.
>
> DGG
> "I am not a bigot: I hate everyone, separately, but equally"
>
>
> On Tue, 29 Jul 2003 06:43:01 GMT, "Mulligan" <(E-Mail Removed)>
> wrote:
>
> >Hi,
> >
> >Need your help on a basic question on balance sheets and profit and loss
> >statements.
> >
> >Suppose a company ABC sells some equipment for USD 10,000 on 60 days

credit
> >on May 1.
> >
> >In the financial statements of ABC, the amount of USD 10,000 is shown as
> >Sales in the profit and loss statement and also accounts receivable in

the
> >balance sheet.
> >
> >It is June 30 and the closing of the quarterly accounts. ABC has not
> >received the USD 10,000 on its due date due to various reasons.
> >ABC decides to specify the 10,000 as Bad Debts in the P & L and releases

the
> >financial statements.
> >
> >
> >A few months later, the buyer decides to pay back the 10,000 that they

owed
> >ABC.
> >
> >How does ABC record this in the financial statement (especially the P&L).
> >They have already specified it as Bad Debts in the P&L.
> >How does ABC show this 'unexpected' income.
> >
> >Its easy to put this in the Cash Flow statement as Cash in - but how

about
> >the P & L.
> >
> >
> >Regards
> >
> >

>












 
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The Prophet, Bubba Hoshimoto
Guest
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Thanked:
 
      07-29-2003, 06:08 PM
"John" <(E-Mail Removed)> wrote in message
news:(E-Mail Removed)...
>
> DGG (generic guy) is correct, he just did not show the original entry
> creating the allowance account which impacts the income statement.
>
>


Ok, that's more like it. After thinking about it, I suspected we weren't
talking about the same thing exactly.


 
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