Assets
The Receivable Events
Each receivable event has a fixed journal entry, and only the estimate touches income.
How the exam words it
- -The stem gives ending AR, a target allowance percentage, and an existing allowance balance and asks 'what is bad debt expense?'.
- -An account is written off and it asks 'the effect on Net Accounts Receivable (NRV)'.
- -Receivables are factored or assigned and it asks for the gain or loss, or how the arrangement 'is presented on the balance sheet'.
- -A bank reconciliation item (NSF check, note collected) asks 'which journal entry is required?'.
The playbook
- 1Balance sheet approach: solve for the entry that moves the allowance to its target; an existing debit balance adds to expense, a credit balance reduces it.
- 2A write-off debits the allowance and credits AR: no income effect and no change in net AR; CECL books lifetime expected losses at origination.
- 3Factoring without recourse is a sale (derecognize AR, book the loss); assignment is a borrowing that leaves AR on the books next to the new note payable.
- 4Book-side reconciliation items (NSF, bank collections, service charges) need entries; deposits in transit and outstanding checks do not.
The trap
Ignoring the existing allowance balance in the balance sheet approach. A debit balance from excess write-offs increases the required expense; a credit balance reduces it.
How the exam varies it
The same pattern, re-skinned along these axes:
Which event: estimate, write-off, factoring, assignment, or reconciliation itemBalance sheet approach versus income statement approachIncome effect versus balance sheet presentation
Drill this pattern
8 questions of The Receivable Events from across the AUD topics. Clear it by getting 5 right with a streak of 3.