Chapter nine

In chapter nine of ‘Fundamental Accounting Principles’, John Wild (2012) discusses the topic on accounting for receivables. This is the amount of capital that that is due from the customers for the credit sales. When accounting for receivables, one must take into consideration factors such as bad debts. These are accounts that belong to customers who have a tendency of not paying the amount that they had said they would. When dealing with such, companies often use the direct write off method where accounts for bad debts are recorded as losses as a result of bad debts receivables which are said to be uncollectible.

A company may give credit to some of its customers upon signing a promissory note. The note requires that the customer will have to pay a certain amount of money to the company, often after a given period of time and with interest. The interest is a charge for letting the customer uses the company’s money until the promissory notes’ due date is reached. While most customers pay the company back before or after the maturity date indicated on the promissory note, there are those who fail to do so and are therefore considered to be bad debts (Wild, 2012).

In most cases, the uncollectible accounts are materiality constraints, that is, the company can ignore them because their effect on the company’s financial statement is insignificant. Through the allowance method, the company will be able to compare the loss from the bad debts against the sales they helped to create for the company. The company can then assess its realizable value which is achieved by estimating the proceedings that are to be achieved after an asset has been converted into cash (Wild, 2012).

 

 

Reference

Wild J, (2012) “Fundamental accounting principles” McGraw Hill