$318,000 Owed by Florists and Event Planners: Aging a Wholesale Flower Supplier's Receivables, Setting the Allowance, Writing Off One Account and Reading the Collection Period
[Student Name]
University of Phoenix
ACC/291: Principles of Accounting II
Week 1 Assignment
[Instructor Name]
[Date]
The business and all figures are a composite written for a model paper.
A composite wholesale flower supplier buys cut flowers, greens and supplies from growers and importers and sells them on 30-day credit to about 400 retail florists, event planners and grocery floral departments. Its sales peak three times a year, around Valentine's Day, Mother's Day and the fall wedding season, and its customers are mostly small businesses with thin margins of their own. Credit sales for the year were $2,400,000. Selling on credit is how the supplier wins florists' business, but every dollar of receivables is a promise that some customers will not keep. This paper estimates how much of the year-end balance will not be collected, records the estimate and interprets what the receivables say about the business.
Why Suppliers Extend Credit
A florist that buys on credit can sell the flowers before paying for them, which matters to a small shop with little cash. Petersen and Rajan (1997) found that trade credit is widely used by small firms and that suppliers extend it partly because they can judge and monitor their customers' condition in ways banks cannot, through the ordering pattern itself. The supplier here sees a warning sign when a regular customer skips a holiday order or pays one invoice late. Credit brings a cost, though: some accounts will go bad, and accounting has to show that cost in the year the sales were made.
The Allowance Method
Under the allowance method, the company estimates at year-end how much of its receivables will not be collected and records that estimate as bad debt expense and as a contra-asset account, the Allowance for Doubtful Accounts (Weygandt et al., 2021). Receivables then appear on the balance sheet at net realizable value, the amount the company expects to collect. The expense lands in the same year as the revenue it relates to, even though no specific customer has yet failed to pay.
Current standards also ask companies to think forward. Under the credit loss standard, a business estimates lifetime expected losses on its receivables from past experience, current conditions and reasonable forecasts, and that approach applies to trade receivables like these (Financial Accounting Standards Board [FASB], 2016). An aging schedule adjusted for current conditions is a common way for a small company to meet it.
Step 1: The Aging Schedule
The December 31 balance of $318,000 is sorted by how long each invoice has been outstanding, and each group receives a loss rate based on the company's own history, raised slightly this year because two event-planning customers had closed after a weak wedding season.
Current, 0 to 30 days: $196,000 at 1%, or $1,960.
31 to 60 days: $72,000 at 4%, or $2,880.
61 to 90 days: $30,000 at 12%, or $3,600.
Over 90 days: $20,000 at 35%, or $7,000.
The required ending allowance is $15,440. The older an invoice is, the less likely it is to be paid, which is why the $20,000 over 90 days accounts for almost half of the estimate even though it is only 6% of the balance.
Step 2: The Adjusting Entry
Before adjustment, the allowance has a credit balance of $2,100, because write-offs during the year used up most of last year's estimate. The adjusting entry brings the allowance to the required $15,440.
Entry: debit Bad Debt Expense $13,340; credit Allowance for Doubtful Accounts $13,340.
The balance sheet now reports Accounts Receivable of $318,000 less the allowance of $15,440, a net realizable value of $302,560. Bad debt expense for the year is $13,340, about 0.56% of credit sales.
Step 3: A Check With the Percentage-of-Sales Method
The percentage-of-sales method estimates the expense directly from the year's credit sales. At the company's historical rate of 0.6%, the expense would be $14,400, and the allowance would end at $16,500. The two methods answer different questions. Percentage of sales focuses on the income statement and matches expense to the year's sales; aging focuses on the balance sheet and asks what the receivables on hand are worth. The results here differ by only $1,060, which gives the owner some confidence that the estimate is reasonable. A larger gap would be a signal to look for a change in the customer mix or in collection habits.
Estimates like this also leave room for judgment. McNichols and Wilson (1988), studying the provision for bad debts, found evidence that managers adjusted the provision in ways that reduced income when earnings were unusually high or unusually low. For the flower supplier, the safeguard is to set the loss rates from actual history, write down the reason for any change and apply the same method each year.
Step 4: Writing Off and Recovering an Account
In February, an event planner that owed $4,800 filed for bankruptcy, and the supplier judged the account uncollectible.
Entry: debit Allowance for Doubtful Accounts $4,800; credit Accounts Receivable $4,800.
The write-off changes no totals that matter. Receivables fall to $313,200 and the allowance to $10,640, but net realizable value remains $302,560, and no expense is recorded, because the loss was already estimated in December.
In June, the bankruptcy trustee paid the supplier $1,200. The company first reverses that part of the write-off, debiting Accounts Receivable and crediting the Allowance for $1,200, and then records the collection, debiting Cash and crediting Accounts Receivable for $1,200. Reinstating the account first leaves a record that the customer paid part of what it owed, which matters if the planner reopens and asks for credit again.
Step 5: How Quickly Customers Pay
Net receivables were $274,000 at the start of the year and $302,560 at the end, an average of $288,280. Receivables turnover is credit sales of $2,400,000 divided by that average, or about 8.3 times. Dividing 365 days by 8.3 gives an average collection period of about 44 days.
The supplier's terms are net 30, so customers are paying about two weeks late on average. That lag ties up roughly $92,000 of cash beyond what the terms would allow, cash the supplier needs to pay growers who expect prompt payment before each holiday. The aging schedule shows where the problem sits: the $50,000 more than 60 days old.
Recommendations
The owner can act on three findings. First, customers with invoices past 60 days should be moved to cash on delivery before the next holiday order, since that group carries most of the expected loss. Second, a small discount for payment within ten days could shorten the collection period for the many florists who pay late out of habit rather than distress. Third, the loss rates should be reviewed each quarter rather than once a year, because the closure of two event planners showed how quickly conditions in one customer group can change.
Conclusion
The flower supplier's $318,000 of receivables is worth about $302,560, and the $13,340 of bad debt expense belongs to the year in which the sales were made. The aging schedule produced the estimate, the percentage-of-sales method confirmed it and the write-off in February showed why the allowance method keeps income stable when a specific customer fails. The collection period of about 44 days, against terms of 30, deserves the owner's closest attention, because it measures how much of the supplier's cash is sitting with its customers.
References
Financial Accounting Standards Board. (2016). Financial instruments, credit losses (Topic 326): Measurement of credit losses on financial instruments (Accounting Standards Update No. 2016-13).
McNichols, M., & Wilson, G. P. (1988). Evidence of earnings management from the provision for bad debts. Journal of Accounting Research, 26, 1-31. https://doi.org/10.2307/2491176
Petersen, M. A., & Rajan, R. G. (1997). Trade credit: Theories and evidence. The Review of Financial Studies, 10(3), 661-691. https://doi.org/10.1093/rfs/10.3.661
Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2021). Accounting principles (14th ed.). Wiley.
How this ACC 291 Week 1 example is structured
The ACC/291 shelf page describes Week 1 as opening with receivables, bad debt estimates and the allowance method. The paper works one company's year-end receivables from the aging schedule to the adjusting entry, because the estimate is the part students find hardest to explain. It then follows a single bad account through write-off and recovery and closes with turnover and days outstanding, which show what the balance means for the company's cash. Students search this week as ACC 291 Week 1, ACC291 Wk 1 or ACC/291 Wk 1; all three are the same assignment.
ACC/291 Week 1 questions, answered
What does ACC/291 Week 1 usually ask for?
The ACC/291 shelf describes Week 1 as opening with receivables, bad debt estimates and the allowance method. Many sections assign problems that estimate uncollectible accounts, record the adjusting entry and write-offs, and compute receivables turnover.
Why is the direct write-off method not used for financial statements?
It records bad debt expense only when a specific account is judged uncollectible, often in a later year than the sale. That breaks the matching of expense to revenue and leaves receivables overstated, so GAAP requires the allowance method whenever bad debts are material.
Does writing off an account reduce net income?
No. Under the allowance method the expense was recorded when the allowance was estimated. The write-off reduces Accounts Receivable and the Allowance by the same amount, so net realizable value and income are unchanged.
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