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In a previous blog, I spoke about tips we can implement to create a smoother path in our CPA journeys.
In this blog, I will provide a real life example illustrating how I implemented tip #2: Know What You Dont Know and Why You Dont Know It.
We will discuss bad debt. While one of the easier concepts to grasp relatively speaking, for some reason I couldnt figure out bad debts. I would get tripped up with recording bad debt expense and writing off receivables.
After being stumped, I stepped away from the studying and reflected for a few minutes why I couldnt understand a relatively easy concept. This simple exercise provided the clarity I needed. What I found out is that I kept confusing the journal entry to record bad debt exp. vs writting off the receivable.
So I knew what I didnt know (bad debts) and why I didnt know it (confusion). I then broke down the entries at a conceptual level. To record bad debts, we debit bad debt expense and credit a contra asset known as Uncollectible Accounts or Allowance for Bad Debts. Since the debt is bad and considered uncollectible, we reduce A/R indirectly with a contra asset account. Hence the term the indirect method of recording bad debt.
Once i understood that recording a bad debt expense didnt remove the receivable from the Accounting records, I understood the entry that writes off the receivable. Since the receivable deemed uncollectible is still part of the A/R and the contra asset account balances, then an entry to reduce both the A/R and contra asset account is required. The contra asset is reduced with a debit and the receivable with a credit.
This same exercise helped better grasp more complicated topics that would take way more space than this to explain. Suffice it to say that when you dont understand something, try to figure out why you dont understand it. Once you know why you dont understand something, proceed accordingly. In my case it was confusion. I then proceded to unravel this confusion. Hope this helps!!!