Accounting for Uncollectible Accounts Receivables

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Allowance for Uncollectible Accounts

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Presentation transcript:

Accounting for Uncollectible Accounts Receivables Chapter 17 Accounting I/II

Section 1 – Uncollectible Accounts

Why sell on account? Encourage sales Uncollectible account (bad debt) Check 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

Total sales on account * Percentage 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 Receivable Amount 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 3 2 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 January 4. Wrote off Metro Food Court’s past-due account as uncollectible, $1,621.00. Memorandum No. 3. 1 2 1. Debit 2. Credit and customer’s name

Posting an Entry to Write Off an Uncollectible Account Receivable 1. Post the debit amount to general ledger. 2. Post the credit amount to general ledger. 1 2 3 3. Post the credit amount to customer account. 4. Write Written off in the customer account. 4

Customer Pays on a Written-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 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. 1 2 1. Enter a debit to Accounts Receivable. Place a diagonal line in the Post. Ref. column. 2. Enter a credit to Allowance for Uncollectible Accounts.

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.

Posting Entries for Collecting a Written-off Account Receivable 1. Post the general journal entry to the general ledger. 1 2 2. Post the debit portion of the general journal entry to the customer account. 3. Write the words Reopen account in the Item column of the customer account. 4. Post the cash receipts journal entry to the customer account. 3 4

Summary of Allowance 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 account Reopen account Record payment

Problems Complete the following on PAPER: Work Together 17-2 On Your Own 17-2 Application 17-2 Finish Chapter 17 Study Guide