Download chapter 24 uncollectible ar

Chapter 24
Uncollectible Accounts
Receivable
Section 1
The Direct Write-Off Method
Direct Write Of Method




Businesses sell on credit because expect to
make more than only accepting cash
Increases Sales, Increases Profits
Check customer credit rating, often require a
credit application
Uncollectible Accounts (Bad Debt): customer
fails to pay amount due on account
 Becomes
an expense to the business
 Removed from AR recorded to expense
Direct Write Off Method

Primarily used by small businesses with few
charge customers

Direct Write Off Method: when businesses
determine that amount owed is not going to be
paid
 uncollectible
amount removed from AR/Subsidiary
(CR) and recorded as an expense
Writing Off An Uncollectible
Account
AR/Robert Galvin
Sales
Sales Tax Payable

265
Entry when not collectible p. 653-654
Uncollectible Account Expense 265
AR/Robert Galvin

250
15
265
Figure 24-1 p. 654 Posting
 NOTE:
description column notes
Collecting a Written-Off Account
Entries p. 655-656

Customer’s account is reinstated
AR/Robert Galvin
265
Uncollectible Account Expense
2.
265
Cash Receipt is recorded
Cash in Bank
AR/Robert Galvin
265
Figure 24-2 p. 656

Subsidiary Ledger shows:



Write Off
Reinstate
Cash Receipt
265
Section 2
The Allowance Method
The Allowance Method
Businesses that have many charge
customers use the Allowance Method
 Allows businesses to match revenue with
expenses incurred to earn that revenue

Matching Uncollectible Accounts
Expense with Revenue



Fundamental Principle – revenue should be
matched with the expenses incurred in
generating that revenue
Meaning: expenses incurred to earn revenue
should be recorded in the same period as the
revenue
Usually the uncollectible account is not
determined until a later period
 Ex.
Sale in late 2012 not determined uncollectible
until 2013

So estimates are done
Matching Uncollectible Accounts
Expense with Revenue (cont.)


Estimated uncollectible amount is
recorded as an adjusting entry at the end
of the period
Meets 2 Objectives
AR is reduced to amount the business can
reasonably expect to receive
2. Estimated uncollectible account expense is
charged to the current period
1.
The Allowance Method



Allowance Method: accounting for
uncollectible accounts matches the estimated
uncollectible accounts expense with sales
made in the same period
Estimated uncollectible accounts expense is
recorded as an adjustment on th Worksheet
2 Accounts Affected
1.
2.
Uncollectible Accounts Expense
Allowance for Uncollectible Accounts
The Allowance Method (cont.)

When estimated, the business does not
know which customers will not pay
 Can

not be CR to AR/Subsidiary
New Account: Allowance for Uncollectible
Accounts (Contra Asset Account)
Allowance for
Uncollectible Accounts

+
On the Balance Sheet as deduction from AR
The Allowance Method (cont.)

By using the Allowance for Uncollectible
Accounts Method
 AR
still = total of customer accounts in
subsidiary
 Allowance for uncollectible accounts balance
represents amount the business estimates to
be uncollectible
 Difference between AR & Allowance for
Uncollectible Accounts represents book value
of AR
The Allowance Method (cont.)


Book Value of AR: amount a business can
reasonably expect to collect from AR
Figure 24-3 p. 660
 Illustrates
how adjustment is recorded and extended
on the Worksheet
 Notice Allowance for Uncollectible Accounts has $125
in Trail Balance CR column, this is carried over from
the previous year
 New balance extended 1st to adjusted Trail Balance
CR column and then Balance Sheet CR column
The Allowance Method (cont.)

Entry p. 660
Dec 31 Uncollectible Accounts Expense
1350
Allowance for Uncollectible Accounts
1350
Reporting Estimated Uncollectible Amounts
on the Financial Statements

Uncollectible Accounts Expense appears on the
Income Statement
 Figure
24-4 p. 661, placement under Operating
Expense

Allowance for Uncollectible Accounts appears on
the Balance Sheet
 Figure
24-5 p. 661 immediately below AR
 AR & Allowance for balance entered in 1st column
 Difference (Book Value) entered in 2nd column
Journalizing the Adjusting Entry for
Uncollectible Accounts
After Worksheet and Financial Statements
are prepared, adjusting entries are
journalized
 Information for entries found in
adjustments section of the Worksheet

 Figure
24-3 p. 660-661
 Figure 24-6 p. 662 Entry & Posting
Dec 31 Uncollectible Accounts Expense
1350
Allowance for Uncollectible Accounts
POST
1350
Journalizing the Adjusting Entry for
Uncollectible Accounts (cont.)
At the end of the period Uncollectible
Accounts Expense is closed to the Income
Summary account
 Balance of Allowance for Uncollectible
Accounts is not affected

Writing Off Uncollectible AR

When it becomes clear that the charge customer will not
pay, amount owned is removed from accounting records

Allowance for Uncollectible Accounts - at the end of the
period it is “filled up” by adjusting entries

Account balance is saved until it is needed in the future

When a charge customer account finally proves
uncollectible, the business dips into reservoir to write off

Meaning: Allowance for Uncollectible Accounts is decreased
when a specific account is written off
Writing Off Uncollectible AR (cont.)

Example p. 663
Allowance for Uncollectible Accounts (-)
AR/Subsidiary (-)

$
$
With this method no expense account is
affected, expense is recorded as an
adjusting entry
Collecting an Account Written Off
by the Allowance Method
1st reinstate the customer’s account
Ex. P. 664-665

Date AR/Subsidiary
Allowance for Uncollectible Accounts
POST
2nd record the cash receipt
Figure 24-7 p. 665

Subsidiary Shows
1. Written Off
2. Reinstated
3. Collected in Full
$
$
Section 3
Estimating Uncollectible
Accounts Receivable
% of Net Sales Method


% of Net Sales Method: the business
assumes that a % of each ale will be
uncollectible
To Determine:
1.
2.
3.
4.
Determine %
Calculate net sales
Multiply net sales by %
Enter amount calculated above on Worksheet
% of Net Sales Method (cont.)

1.
2.
Ex. P. 667-668
P. 667 (bottom)
P. 669 (top)
Sales
Less: Discounts
Returns & Allowances
Net Sales
3.
4.
$
$
$
-$
$
Net Sales x % = Estimated Uncollectible
Amount
Enter estimated uncollectible as adjustment on
the Worksheet, later it will be journalized

Beginning the next period Allowance for
Uncollectible Accounts will have $1475 CR balance
(125 previous and 1350 this period)
The Aging of AR Methods



The Aging of AR Methods: uncollectible
accounts expense is based on the date each
customer account is due
Ensures that the longer accounts are overdue,
less likely to collect
To Determine…
1.
Age, classify or group accounts according to date

2.
3.
4.
Ex 0-30, 31-60, 61-90, 90+
Determine % for each group
Multiply amount per group by % for that group and
add results
Enter on the Worksheet total estimated uncollectible
(from #3) adjusted by any balance in Allowance for
Uncollectible Accounts
The Aging of AR Methods (cont.)

Ex. P. 668
P. 668 (bottom)
2. P. 669 (middle)
3. P. 669 (middle)
4. P. 669 last 3 paragraphs and T Accounts
1.