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1.AccountsReceivableOneofthekeyfactorsunderlyingthegrowthoftheAmericaneconomyisthetrendtowardsellinggoodsandservicesoncredit.Accountsreceivablecomprisethelargestfinancialassetofmanymerchandisingcompanies.Accountsreceivablearerelativelyliquidassets,usuallyconvertingintocashwithinaperiodof30to60days.Therefore,accountsreceivablefromcustomersusuallyappearinthebalancesheetimmediatelyaftercashandshort-terminvestmentsinmarketablesecurities.2.UNCOLLECTIBLEACCOUNTSAccountsreceivableareshowninthebalancesheetattheestimatedcollectibleamount—callednetrealizablevalue.Nobusinesswantstosellmerchandiseonaccounttocustomerswhowillbeabletopay.Manycompaniesmaintaintheirowncreditdepartmentsthatinvestigatethecreditworthinessofeachprospectivecustomer.Nonetheless,ifacompanymakescreditsalestohundreds—perhapsthousands—ofcustomers,someaccountsinevitablywillturnouttobeuncollectible.Alimitedamountofuncollectibleaccountsisnotonlyexpected—itisevidenceofasoundcreditpolicy.Ifthecreditdepartmentisoverlycautious,thebusinessmaylosemanysalesopportunitiesbyrejectingcustomerswhoshouldhavebeenconsideredacceptablecreditrisks.3.THEALLOWANCEFORDOUBTFULACCOUNTSThereisnowayoftellinginadvancewhichaccountsreceivablewillprovetobeuncollectible.Itisthereforenotpossibletocredittheaccountsofspecificcustomersforourestimateofprobableuncollectibleaccounts.NeithershouldwecredittheAccountsReceivablecontrolaccountinthegeneralledger.IftheAccountsReceivablecontrolaccountsweretobecreditedwiththeestimatedamountofdoubtfulaccounts,thiscontrolaccountwouldnolongerbeinbalancewiththetotalofthenumerouscustomers’accountsinthesubsidiaryledger.ApracticalalternativethereforeistocreditaseparateaccountcalledAllowanceforDoubtfulAccountswiththeamountestimatedtobeuncollectible.TheAllowanceforDoubtfulAccountsoftenisdescribedasacontra-assetaccountoravaluationaccount.BothofthesetermsindicatethattheAllowanceforDoubtfulAccountshasacreditbalance,whichisoffsetagainsttheassetAccountsReceivabletoproduceamoreusefulandreliablemeasureofacompany’sliquidity.BecausetheAllowanceforDoubtfulAccountsismerelyanestimateandnotaprecisecalculation,professionaljudgmentplaysaconsiderableroleindeterminingthesizeofthisvaluationaccount.MonthlyAdjustmentoftheAllowanceAccountIntheadjustingentrymadebyWorldFamousToyCo.atJanuary31,theamountoftheadjustment($10,000)wasequaltotheestimatedamountofuncollectibleaccounts.ThisistrueonlybecauseJanuarywasthefirstmonthofoperationsandthiswasthecompany’sfirstestimateofitsuncollectibleaccounts.Infuturemonths,theamountoftheadjustingentrywilldependontwofactors:(1)theestimateofuncollectibleaccountsand(2)thecurrentbalanceintheAllowanceforDoubtfulAccounts.Beforeweillustratetheadjustingentryforafuturemonth,letusseewhythebalanceintheallowanceaccountmaychangeduringtheaccountingperiod.WRITINGOFFANUNCOLLECTIBLEACCOUNTRECEIVABLEWheneveranaccountreceivablefromaspecificcustomerisdeterminedtobeuncollectible,itnolongerqualifiesasanassetandshouldbewrittenoff.Towriteoffanaccountreceivableistoreducethebalanceofthecustomer’saccounttozero.ThejournalentrytoaccomplishthisconsistsofacredittotheAccountsReceivablecontrolaccountinthegeneralledger(andtothecustomer’saccountinthesubsidiaryledger)andanoffsettingdebittotheAllowanceforDoubtfulAccounts.Toillustrate,assumethat,earlyinFebruary,WorldFamousToyCo.learnsthatDiscountStoreshasgoneoutofbusinessandthatthe$4,000accountreceivablefromthiscustomerisnowworthless.Theentrytowriteoffthisuncollectibleaccountreceivableis:AllowanceforDoubtfulAccounts…………………4,000AccountsReceivable(DiscountStores)……………………4,000TowriteofftheaccountreceivablefromDiscountStoresasuncollectible.TheimportantthingtonoteinthisentryisthatthedebitismadetotheAllowanceforDoubtfulAccountsandnottotheUncollectibleAccountsExpenseaccount.TheestimatedexpenseofcreditlossesischargedtotheUncollectibleAccountsExpenseaccountattheendofeachaccountingperiod.Whenaspecificaccountreceivableislaterdeterminedtobeworthlessandiswrittenoff,thisactiondoesnotrepresentanadditionalexpensebutmerelyconfirmsourpreviousestimateoftheexpense.IftheUncollectibleAccountsExpenseaccountwasfirstchargedwithestimatedcreditlossesandthenlaterchargedwithprovencreditlosses,wewouldbedouble-countingtheactualuncollectibleaccountsexpense.Noticealsothattheentrytowriteoffanuncollectibleaccountreceivablereducesboththeassetaccountandthecontra-assetaccountbythesameamount.Thuswritingoffanuncollectibleaccountdoesnotchangethenetrealizablevalueofaccountsreceivableinthebalancesheet.INTERNALCONTROLSFORRECEIVABLESOneofthemostimportantprinciplesofinternalcontrolisthatemployeeswhohavecustodyofcashorothernegotiableassetsmustnotmaintainaccountingrecords.Inasmallbusiness,oneemployeeoftenisresponsibleforhandingcashreceipts,maintainingaccountsreceivablerecords,issuingcreditmemoranda,andwritingoffuncollectibleaccounts.Suchacombinationofdutiesisaninvitationtofraud.Theemployeeinthissituationisabletoremovethecashcollectedfromacustomerwithoutmakinganyrecordofthecollection.Thenextstepistodisposeofthebalanceinthecustomer’saccount.Thiscanbedonebyissuingacreditmemoindicatin