0:00:00.240,0:00:03.360

All right. Here we go with the heavy

0:00:01.520,0:00:04.319

stuff when it comes to chapter seven,

0:00:03.360,0:00:05.759

we're going to be talking about the

0:00:04.319,0:00:06.879

allowance method and that's the the

0:00:05.759,0:00:09.120

method that we use

0:00:06.879,0:00:10.639

when we're dealing with receivables.

0:00:09.120,0:00:12.160

So let's talk about this and we'll get

0:00:10.639,0:00:13.679

some more stuff as we go in the

0:00:12.160,0:00:14.880

the videos and whatnot but I really want

0:00:13.679,0:00:16.320

to make sure you understand this this

0:00:14.880,0:00:17.279

allowance method

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because it's actually going to kind of

0:00:17.279,0:00:21.680

throw a curve ball at you we're going to

0:00:18.480,0:00:23.199

introduce a new type of account.

0:00:21.680,0:00:25.119

So what this does is it matches the

0:00:23.199,0:00:27.199

estimated losses from uncollectable

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accounts receivables against the sales

0:00:27.199,0:00:31.119

they help produce what that means is

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when you put it on your balance sheet

0:00:31.119,0:00:33.600

that you have

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accounts receivables of this amount and

0:00:33.600,0:00:37.200

you leave it at that

0:00:35.040,0:00:38.559

what you're implying is is that this is

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what I'm going to receive

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but in reality you know you're not going

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to receive that because people don't pay

0:00:41.520,0:00:43.680

sometimes people can't pay or they don't

0:00:42.960,0:00:45.200

pay

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so by just keeping it at that amount

0:00:45.200,0:00:49.520

you're not really showing the full story

0:00:47.520,0:00:50.800

and you're also saying that this is

0:00:49.520,0:00:53.360

everything you're gonna 

0:00:50.800,0:00:54.719

receive in revenue and uh you're gonna

0:00:53.360,0:00:56.559

have to pay the full amount on this

0:00:54.719,0:00:58.160

and not keeping up with what you

0:00:56.559,0:01:00.719

actually are losing

0:00:58.160,0:01:02.559

for people not paying. So at the end of

0:01:00.719,0:01:04.479

the accounting period bad debt expense

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is estimated and recorded in an

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adjusting entry,

0:01:05.680,0:01:08.799

we've got to figure out how much we

0:01:06.960,0:01:09.760

think we're not going to get and that

0:01:08.799,0:01:11.280

amount that we think we're not going to

0:01:09.760,0:01:12.320

get we're going to lose from our

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accounts receivables

0:01:12.320,0:01:17.200

we're going to go ahead and expense that

0:01:13.600,0:01:17.200

through what's called bad debt expense.

0:01:17.280,0:01:20.479

The advantages of using the allowance

0:01:18.799,0:01:22.880

method for valuing

0:01:20.479,0:01:24.320

accounts receivables are at one it

0:01:22.880,0:01:26.320

records bad debt expense

0:01:24.320,0:01:28.560

and when the related sales are recorded

0:01:26.320,0:01:30.079

so again it matches the expense with the

0:01:28.560,0:01:32.560

revenue so we're following the matching

0:01:30.079,0:01:33.840

principle and it also records the

0:01:32.560,0:01:35.600

accounts receivables on the balance

0:01:33.840,0:01:37.360

sheet and an estimated amount

0:01:35.600,0:01:39.759

of cash to be collected, so again I'm

0:01:37.360,0:01:41.200

giving the full picture to my investors

0:01:39.759,0:01:43.360

I'm not saying this is what I'm going to

0:01:41.200,0:01:45.280

get I'm really saying this is what I

0:01:43.360,0:01:46.720

potentially could get but this is really

0:01:45.280,0:01:48.159

what I think I'm actually going to get

0:01:46.720,0:01:49.840

after they don't pay me a certain

0:01:48.159,0:01:52.399

percentage doesn't pay me.

0:01:49.840,0:01:53.840

So there are a few ways that we can

0:01:52.399,0:01:55.439

find out that

0:01:53.840,0:01:57.360

bad debt there's three main ways that we

0:01:55.439,0:01:59.200

can calculate bad debt.

0:01:57.360,0:02:00.880

The first one is going to be a

0:01:59.200,0:02:01.920

percentage of sales method

0:02:00.880,0:02:03.200

as the name implies we're going to take

0:02:01.920,0:02:04.799

a percentage of what we sell for that

0:02:03.200,0:02:06.479

year, we also have percentage of

0:02:04.799,0:02:08.479

receivables method which is the percent

0:02:06.479,0:02:10.160

of whatever our receivables balances,

0:02:08.479,0:02:11.840

and then we also have the aging schedule

0:02:10.160,0:02:13.680

or aging of receivables and that

0:02:11.840,0:02:15.040

makes it a little bit more accurate

0:02:13.680,0:02:16.080

because we itemize those things a little

0:02:15.040,0:02:17.440

bit better

0:02:16.080,0:02:18.800

but in the next videos we're going to be

0:02:17.440,0:02:19.360

talking about each individual one of

0:02:18.800,0:02:21.840

those

0:02:19.360,0:02:23.920

and how we do those methods.

0:02:21.840,0:02:23.920

Appreciate it.