Chapter 8 Receivables 357Other Receivables
Other receivables are normally listed separately on the balance sheet. If they are ex-
pected to be collected within one year, they are classified as current assets. If collection
is expected beyond one year, they are classified as noncurrent assets and reported un-
der the caption Investments.Other receivablesinclude interest receivable, taxes receiv-
able, and receivables from officers or employees.UNCOLLECTIBLE RECEIVABLES
In prior chapters, we described and illustrated the accounting for transactions involv-
ing sales of merchandise or services on credit. A major issue that we have not yet dis-
cussed is that some customers will not pay their accounts. That is, some accounts
receivable will be uncollectible.
Many retail businesses may shift the risk of uncollectible receivables to other com-
panies. For example, some retailers do not accept sales on account, but will only ac-
cept cash or credit cards. Such policies shift the risk to the credit card companies.
Companies may also sell their receivables to other companies. This is often the case
when a company issues its own credit card. For example, Macy’s,Sears, and JCPenney
issue their own credit cards. Selling receivables is called factoringthe receivables, and
the buyer of the receivables is called a factor. An advantage of factoring is that the com-
pany selling its receivables receives immediate cash for operating and other needs. In
addition, depending upon the factoring agreement, some of the risk of uncollectible
accounts may be shifted to the factor.
Regardless of the care used in granting credit and the collection procedures used,
a part of the credit sales will not be collectible. The operating expense recorded from
uncollectible receivables is called bad debt expense,uncollectible accounts expense, or
doubtful accounts expense.
When does an account or a note become uncollectible? There is no general rule for
determining when an account is uncollectible. Once a receivable is past due, a com-
pany should first notify the customer and try to collect the account. If after repeated
attempts the customer doesn’t pay, the company may turn the account over to a col-
lection agency. After the collection agency attempts collection, any remaining balance
in the account is considered worthless. One of the most significant indications of par-
tial or complete uncollectibility occurs when the debtor goes into bankruptcy. Other
indications include the closing of the customer’s business and an inability to locate or
contact the customer.
There are two methods of accounting for receivables that appear to be uncol-
lectible: the direct write-off method and the allowance method. The direct write-off
methodrecords bad debt expense only when an account is judged to be worthless. The
allowance methodrecords bad debt expense by estimating uncollectible accounts at
the end of the accounting period.
In the next sections of this chapter, we describe and illustrate the accounting for
bad debt expense using the direct write-off method and the allowance method. We
begin by describing and illustrating the direct write-off method since it is simpler and
easier to understand. The direct write-off method is used by smaller companies and by
companies with few receivables.^1 Generally accepted accounting principles, however,
require companies with a large amount of receivables to use the allowance method.Describe the nature of and
the accounting for uncol-
lectible receivables.
2
1 The direct write-off method is also required for federal income tax purposes.