ACCOUNTING FOR UNCOLLECTIBLE

ACCOUNTS RECEIVABLES

Chapter 17

Accounting I/II

SECTION 1 – Uncollectible Accounts

WHY SELL ON ACCOUNT? Encourage salesCheck credit history

Uncollectible account (bad debt) Expense to business

Two ways to handle uncollectible accounts Allowance Method Direct Write-Off Method

*We will focus on the Allowance Method*

ALLOWANCE METHOD

CONCEPT: Matching Expenses with Revenue

Meets two objectives: Assets not overstated on Balance Sheet Expenses not understated on Income Statement

ALLOWANCE METHOD (CONT.)

Businesses estimate uncollectible accounts expense and record as an adjusting entry at the end of the period.

Two methods for estimating this expense% of total sales on account% of net sales

PERCENT OF SALES

% of total sales

Total sales on account * Percentage

% of net sales

Net sales * Percentage

Net Sales = Sales – (Sales Discount + Sales Returns & Allowances)

RECORDING ADJUSTING ENTRY Debit: Uncollectible Accounts Expense Credit: Allowance for Uncollectible Accounts**Contra-asset account to Accounts Receivable

Book Value of Accounts ReceivableAmount business can reasonably expect to receive from all accounts receivable

Accts Rec – Allowance for Uncollectible Accts

ANALYZING AND RECORDING AN ADJUSTMENT FOR UNCOLLECTIBLE ACCOUNTS RECEIVABLE

1

2

3 3

1. Enter and label credit amount.

2. Enter and label debit amount.

3. Record adjusting entry.

PROBLEMS

Complete the following on PAPER: Work Together 17-1 On Your Own 17-1 Application 17-1

Chapter 17 Study Guide

SECTION 2 – Writing Off and Collecting

Uncollectible Accounts Receivable

WRITING OFF AN ACCOUNT

When an account has been labeled as uncollectible it must be written-off as an expense of the business.

Debit: Allowance for Uncollectible Accounts

Credit: Accounts Receivable/Customer

When posting, “Written Off” is recorded in the item column.

JOURNALIZING WRITING OFF AN UNCOLLECTIBLE ACCOUNT

1

January 4. Wrote off Metro Food Court’s past-due account as uncollectible, $1,621.00. Memorandum No. 3.

1. Debit2. Credit and customer’s name

2 2

POSTING AN ENTRY TO WRITE OFF AN UNCOLLECTIBLE ACCOUNT RECEIVABLE

2. Post the credit amount to general ledger.

4

1

2

3

1. Post the debit amount to general ledger.

3. Post the credit amount to customer account.

4. Write Written off in the customer account.

CUSTOMER PAYS ON AWRITTEN-OFF ACCOUNT Must do two things:Reopen account

Debit: Accounts Receivable/Customer Credit: Allowance for Uncollectible Accounts General Journal When posting, “Reopen account” is recorded in the Item column.

Record payment Debit: Cash Credit: Accounts Receivable/Customer Cash Receipts Journal

REOPENING AN ACCOUNT PREVIOUSLY WRITTEN OFF

1. Enter a debit to Accounts Receivable. Place a diagonal line in the Post. Ref. column.

2

January 30. Received cash in full payment of Metro Food Court’s account, previously written off as uncollectible, $1,621.00. Memorandum No. 5 and Receipt No. 12.

2. Enter a credit to Allowance for Uncollectible Accounts.

1

1

RECORDING CASH RECEIVED FOR AN ACCOUNT PREVIOUSLY WRITTEN OFF

January 30. Received cash in full payment of Metro Food Court’s account, previously written off as uncollectible, $1,621.00. Memorandum No. 5 and Receipt No. 12.

3. Write the words Reopen account in the Item column of the customer account.

POSTING ENTRIES FOR COLLECTING A WRITTEN-OFF ACCOUNT RECEIVABLE

3

2

11

4

1. Post the general journal entry to the general ledger.

2. Post the debit portion of the general journal entry to the customer account.

4. Post the cash receipts journal entry to the customer account.

SUMMARY OFALLOWANCE METHOD

At the end of each fiscal period, uncollectible accounts expense is estimated and adjusting entry is recorded

Customer account is written off

If customer pays after writing off accountReopen accountRecord payment

PROBLEMS

Complete the following on PAPER: Work Together 17-2 On Your Own 17-2 Application 17-2

Finish Chapter 17 Study Guide