Currently under LAMC Section 21.00, taxpayers are required to report their gross receipts using the accrual accounting method including any bad debts that are never collected. Effective January 1, 2005, gross receipts can now be calculated on either a cash or accrual basis (with a deduction for bad debts) in accordance with Internal Revenue Service guidelines. This means that a business owner can now report gross receipts to the City of Los Angeles, Office of Finance in the same manner gross receipts were calculated (cash or accrual) and reported to the IRS. The definition of gross receipts as used in this article has been amended to exclude any uncollectible amount apportioned to the City of Los Angeles which is written off in the taxpayer’s IRS filing provided that the bad debt amount was previously reported as income (gross receipts). Please see apportionment rules under the Business Tax Rulings. However, the collection of any bad debt amount that had been previously written off and is later collected, is to be reported as gross receipts in the year it is collected. Generally, a business that uses an accrual method of accounting will normally report income as it is earned (billed). Under this method of accounting, a business reports income in the year earned and deducts bad debt expenses in the year the expenses are written off. Accrual MethodA department store had gross receipts (billings) of $1,000,000 in 2016 and also had uncollectible bad debts that same year in the amount of $50,000 attributable to sales made in the prior calendar year (2015), which were reported in the 2016 business tax renewal. The business will be able to deduct the uncollectible bad debt expenses from gross receipts, provided that the bad debts have been reported to the IRS.
Cash methodA business that uses a cash method of accounting, will normally report income when payment is received. For example: A doctor had $500,000 in taxable cash receipts received during his 2016 fiscal year. In 2017, he will report $500,000 as his taxable gross receipts, provided he reports his income to the IRS on a cash basis. A business cannot take a bad debt deduction for amounts owed to it, that it has not received, and cannot collect if these amounts have never been included in income. For example, a cash basis accountant cannot take a bad debt deduction if a client does not pay the bill because the accountant’s fee was not previously included in income. Most individuals and many sole proprietors with no inventory use the cash method because they find it easier to keep cash method records. However, if an inventory is necessary to account for a business' income, an accrual method of accounting for sales and purchases should be used. Under IRS regulations, if a business wants to change its accounting method, it must generally get IRS approval. Therefore, the Office of Finance will not allow taxpayers to change their accounting method unless they have received IRS approval. **Please note that this amendment became effective January 1, 2005. Frequently Asked QuestionsI have a business and my accounting method is on a cash basis. Will I be able to report my gross receipts on a cash basis? Yes, effective January 1, 2005, gross receipts can be reported on a cash basis, provided that this is the method you report to the IRS. My business maintains records on an accrual basis. I have always included bad debts when I have reported my gross receipts. Will I be able to deduct bad debts from my gross receipts? Yes, effective January 1, 2005, businesses filing on an accrual basis will be able to deduct the apportioned bad debts that are uncollectible, provided that they have previously been reported as gross receipts to the City. Example: A pharmacist generated a total of $250,000 in gross receipts in 2016. That same tax year, the pharmacist had written off bad debts in the amount of $25,000 (uncollectible from the prior year), which were reported as gross receipts for the 2015 business tax renewal. The pharmacist also reports these bad debts as uncollectible to the IRS in 2016. What should the pharmacist report as taxable gross receipts for the 2017 business tax renewal? The pharmacist will report $225,000 in gross receipts for the 2017 business tax renewal. **Please note that this amendment becomes operative on January 1, 2005 and taxpayers must still report under the prior accrual method for any prior tax years.
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The allowance method that assumes a given percent of a company’s credit sales for the period is uncollectible is:___________. a. The percent of sales method. b. The percent of accounts receivable method. c. The aging of accounts receivable method. d. Direct write-off method. e. Factoring method. An allowance for doubtful accounts is considered a “contra asset,” because it reduces the amount of an asset, in this case the accounts receivable. The allowance, sometimes called a bad debt reserve, represents management’s estimate of the amount of accounts receivable that will not be paid by customers. If actual experience differs, then management adjusts its estimation methodology to bring the reserve more into alignment with actual results. In accrual-basis accounting, recording the allowance for doubtful accounts at the same time as the sale improves the accuracy of financial reports. The projected bad debt expense is properly matched against the related sale, thereby providing a more accurate view of revenue and expenses for a specific period of time. In addition, this accounting process prevents the large swings in operating results when uncollectible accounts are written off directly as bad debt expenses. Units should consider using an allowance for doubtful accounts when they are regularly providing goods or services “on credit” and have experience with the collectability of those accounts. The following entry should be done in accordance with your revenue and reporting cycles (recording the expense in the same reporting period as the revenue is earned), but at a minimum, annually. DR Bad Debt Expense CR Allowance for Doubtful Accounts
When it is determined that an account cannot be collected, the receivable balance should be written off. When the unit maintains an allowance for doubtful accounts, the write-off reduces the outstanding accounts receivable, and is charged against the allowance – do not record bad debt expense again! DR Allowance for Doubtful Accounts CR Accounts Receivable For detailed expectations and guidelines related to write offs, see Writing Off Uncollectable Receivables. Recommended textbooks for you Intermediate Accounting: Reporting And Analysis Author:James M. Wahlen, Jefferson P. Jones, Donald Pagach Publisher:Cengage Learning Principles of Accounting Volume 1 Publisher:OpenStax College College Accounting, Chapters 1-27 Publisher:Cengage Learning, Financial Accounting Intro Concepts Meth/Uses Cornerstones of Financial Accounting Author:Jay Rich, Jeff Jones Publisher:Cengage Learning Century 21 Accounting Multicolumn Journal Intermediate Accounting: Reporting And Analysis ISBN:9781337788281 Author:James M. Wahlen, Jefferson P. Jones, Donald Pagach Publisher:Cengage Learning Principles of Accounting Volume 1 ISBN:9781947172685 Author:OpenStax Publisher:OpenStax College College Accounting, Chapters 1-27 ISBN:9781337794756 Author:HEINTZ, James A. Publisher:Cengage Learning, Financial Accounting Intro Concepts Meth/Uses ISBN:9781285595047 Author:Weil Publisher:Cengage Cornerstones of Financial Accounting ISBN:9781337690881 Author:Jay Rich, Jeff Jones Publisher:Cengage Learning Century 21 Accounting Multicolumn Journal ISBN:9781337679503 Author:Gilbertson Publisher:Cengage |
Which method of recording bad debt loss is consistent with accrual accounting
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