CACI-U3-L08 · Canadian Accounting Common Core I
Receivables and credit risk
Learning goals
- Record credit sales, collections, expected losses, write-offs, and recoveries.
- Build an accounts-receivable aging estimate.
- Distinguish gross receivables, allowance, and net carrying amount.
- Reconcile the A/R control account to customer subsidiary records.
- Assess a credit policy using profit, cash, risk, and customer evidence.
Prerequisite check
- A $4,000 sale was already recorded. What entry records its collection?
- Why can reported revenue be correct while the receivable asset is overstated?
Vocabulary
- Accounts receivable (A/R): amounts customers owe from ordinary credit transactions.
- Allowance for doubtful accounts: contra asset representing estimated uncollectible amounts.
- Aging schedule: groups receivables by time outstanding and applies evidence-based loss estimates.
- Write-off: removal of a specific receivable judged uncollectible.
- Net realizable/carrying amount: gross receivables less the related allowance in a simple presentation.
- Expected credit loss: forward-looking IFRS 9 impairment concept; application can be more complex than this introductory model.
- Subsidiary ledger: customer-by-customer detail supporting the A/R control total.
Core idea
Credit sales create both revenue and collection risk. Recording the full receivable without assessing impairment can overstate assets and profit. An allowance estimate recognizes expected loss in the appropriate period while keeping specific customer balances visible until write-off.
IFRS 9 and ASPE financial-instrument impairment requirements differ. This lesson's aging mechanics build foundational reasoning, not a complete standards analysis. Use current guidance for probability weighting, forward-looking information, recognition triggers, and measurement.
Why this treatment makes sense
Waiting until a customer definitively fails can report overly optimistic assets for months. An aging model uses historical loss experience adjusted for current and supportable conditions. A write-off then uses the allowance, not a new bad debt expense, when the expected loss was already recognized.
A repeatable method
Use RECONCILE–AGE–ADJUST–MONITOR:
- Reconcile opening A/R + credit sales − collections − write-offs ± corrections to ending A/R.
- Age valid customer balances and investigate credits/disputes.
- Apply documented rates adjusted for present and forecast evidence.
- Adjust the allowance from its current balance to the required ending target.
- Monitor days outstanding, disputes, concentration, cash collection, and model accuracy.
Worked example
At December 31, Boreal Office Supply has:
| Age | Receivable | Estimated loss rate | Expected loss |
|---|---|---|---|
| Current | $40,000 | 1% | $400 |
| 1–30 days overdue | 12,000 | 5% | 600 |
| More than 30 days overdue | 8,000 | 20% | 1,600 |
| Total | $60,000 | $2,600 |
The unadjusted Allowance has a $700 credit balance. Required adjustment: $2,600 target − $700 existing credit = $1,900.
| Account | Debit | Credit |
|---|---|---|
| Impairment / Bad Debt Expense | $1,900 | — |
| Allowance for Doubtful Accounts | — | $1,900 |
Net receivables are $60,000 − $2,600 = $57,400.
In February, a $900 customer balance included in the estimate is authorized for write-off:
| Account | Debit | Credit |
|---|---|---|
| Allowance for Doubtful Accounts | $900 | — |
| Accounts Receivable—Customer | — | $900 |
The write-off reduces gross A/R and allowance equally, so net receivables are unchanged at that moment. If the customer unexpectedly pays later, a common method reinstates the receivable (reverse the write-off) and then records Cash Dr / A/R Cr, preserving the collection trail.
Journal, ledger, and statement connection
Credit sale: Dr A/R / Cr Revenue. Collection: Dr Cash / Cr A/R. Period-end loss estimate: Dr impairment expense / Cr allowance. Specific write-off: Dr allowance / Cr A/R. The A/R control account must equal the sum of customer balances; the allowance is not subtracted from each customer's legal amount due.
Common mistakes
- Crediting Revenue again when collecting a receivable.
- Debiting bad debt expense at write-off after an allowance was established.
- Recording the required ending allowance as the adjustment without considering its existing balance.
- Applying old loss rates blindly after customer mix or the economy changes.
- Hiding disputed invoices in “past due” rather than resolving billing errors.
- Netting customer debit and credit balances without a valid right/basis.
- Confusing stronger collection with stronger sales; both revenue quality and customer relationships matter.
Guided practice
A/R is $90,000: current $55,000 at 1%; 1–60 days overdue $25,000 at 6%; over 60 days $10,000 at 30%. The allowance has a $400 debit balance before adjustment. Calculate the required allowance, adjustment, and net receivables. Explain why a debit balance can occur.
Independent practice
Red Pine Rentals reports opening A/R $72,000, credit sales $310,000, collections $296,000, write-offs $4,500, and no other valid entries. Its ledger ending A/R is $83,000. Reconcile and find the unexplained difference. Then assume the correct balance is aged: $60,000 at 1%, $15,000 at 8%, and the remainder at 35%. The allowance has $1,100 credit before adjustment. Compute the adjustment and net A/R. Draft two sentences on whether to tighten credit terms if tighter terms would reduce expected annual contribution margin by $7,000 but expected credit losses by only $4,000.
Self-check and solutions
Guided: Required allowance = $550 + $1,500 + $3,000 = $5,050. Moving from $400 debit to $5,050 credit requires a $5,450 credit to allowance and debit to impairment expense. Net A/R = $84,950. A debit can result when write-offs exceeded the prior estimate; investigate, but do not simply net the sign away.
Independent: Expected ending A/R = $72,000 + $310,000 − $296,000 − $4,500 = $81,500. Ledger is $1,500 too high; trace postings/source documents rather than plug. Aging remainder is $6,500. Required allowance = $600 + $1,200 + $2,275 = $4,075. Adjustment = $2,975; net A/R = $77,425. On the limited quantitative facts, tightening terms sacrifices $7,000 to save $4,000, a $3,000 net disadvantage. Still consider cash timing, staff collection cost, bad-debt uncertainty, concentration, capacity, and customer lifetime effects before recommending.
Retrieval practice
- State the four entry patterns for sale, collection, estimate, and write-off.
- Why does a write-off usually not change net receivables immediately?
- How do you adjust from an existing allowance to a target?
- Name two forward-looking facts an aging model should consider.
Exam-style application
Required ending allowance is $7,800. The ledger currently has a $1,300 debit balance. A student records $6,500 expense. Diagnose and quantify the effects.
Target: Adjustment is $9,100, not $6,500. The student leaves allowance understated and net receivables/profit/equity overstated by $2,600.
Lesson summary
Receivable accounting combines transaction accuracy with forward-looking credit risk. Reconcile the gross ledger, estimate a defensible ending allowance, and connect credit policy to contribution, cash, risk, and customers.