Accounts Receivables And Depreciation

Introduction The financial statements are used to measure the liquidity and strength of a business. On the balance sheet; offsets are used to calculate the real value of accounts receivables and fixed assets. These offsets are called uncollectible accounts receivables and depreciation. In accordance with generally accepted accounting principles (GAAP), there are two methods used to compute the uncollectible accounts receivable expense. Just like uncollectible accounts offset the value of accounts receivables; so do depreciation expenses counteract the value of fixed assets. Also called contra accounts, the journal entries are accumulated and recorded on the balance sheet.

Part One – Uncollected Receivables The first is called the write-off method. This

Chapter nine entitled “Receivables” (2014, p. 407) further explains: “The preceding adjusting entry affects the income statement and the balance sheet”. Ultimately, the adjustment to accounts receivables decreases the value to $360,000; computed as $400,000 - $40,000 = $360,000. This new value is called the net realizable value of accounts receivable for the period ending December 31st.

Part Two - Depreciation In order to affirm the value of a fixed asset, on the balance sheet, depreciation is used to show the asset’s true value. There are three methods for estimating depreciation expense; straight-line method, units-of-output method, and, double-declining-balance. Furthermore, with the straight-line method the write-off is applied directly to the customer account that has become uncollectible. On the other hand, the units-of-output and double-declining-balance methods are credited to an allowance account. This allowance for doubtful accounts is created to record the estimate of bad debts. Both the write-offs and allowance for doubtful accounts are used to calculate an asset’s true worth on the balance