Uncollectible Accounts Receivable Making Accounting Relevant Businesses grant customers the right to use credit instead of cash to purchase items. Sometimes customers fail to pay their debts to the business. These debts are called uncollectible accounts. Making Accounting Relevant Businesses grant customers the right to use credit instead of cash to purchase items. Sometimes customers fail to pay their debts to the business. These debts are called uncollectible accounts. What effect do these uncollectible accounts have on the business?

Section 1The Direct Write-Off Method What You’ll Learn  Why businesses extend credit.  The direct write-off method of accounting for uncollectible accounts.  How to record the direct write-off on an uncollectible accounts receivable.  How to record the collection of an account that was previously written- off under the direct write-off method. What You’ll Learn  Why businesses extend credit.  The direct write-off method of accounting for uncollectible accounts.  How to record the direct write-off on an uncollectible accounts receivable.  How to record the collection of an account that was previously written- off under the direct write-off method.

Why It’s Important Sometimes charge customers fail to pay the amounts they owe. Unpaid accounts are eventually removed from the accounting records. Why It’s Important Sometimes charge customers fail to pay the amounts they owe. Unpaid accounts are eventually removed from the accounting records. Key Terms  uncollectible accounts  direct write-off method Key Terms  uncollectible accounts  direct write-off method Section 1The Direct Write-Off Method (cont'd.)

The Direct Write-Off Method  An uncollectible account, or bad debt, is created when a customer fails to pay the amount due on account.  Under the direct write-off method, when the business determines that the amount owed is not going to be paid, the uncollectible account is removed from the accounting records.  Uncollectible Accounts Expense is debited and Accounts Receivable (both controlling and subsidiary) is credited.  An uncollectible account, or bad debt, is created when a customer fails to pay the amount due on account.  Under the direct write-off method, when the business determines that the amount owed is not going to be paid, the uncollectible account is removed from the accounting records.  Uncollectible Accounts Expense is debited and Accounts Receivable (both controlling and subsidiary) is credited. Section 1The Direct Write-Off Method (cont'd.)

Writing Off an Uncollectible Account Section 1The Direct Write-Off Method (cont'd.) Business Transaction On August 25, On Your Mark wrote off as uncollect- ible Robert Galvin’s account for $265, Memorandum 170. ANALYSIS Identify1.The accounts affected are Uncollectible Accounts Expense, Accounts Receivable (controlling), and Accounts Receivable—Robert Galvin (subsidiary).

Writing Off an Uncollectible Account (cont'd.) Section 1The Direct Write-Off Method (cont'd.) Business Transaction (cont'd.) On August 25, On Your Mark wrote off as uncollec- tible Robert Galvin’s account for $265, Memorandum 170. ANALYSIS Classify2.Uncollectible Accounts Expense is an expense account. Accounts Receivable (controlling) and Accounts Receivable—Robert Galvin (subsidiary) are asset accounts.

Writing Off an Uncollectible Account (cont'd.) Section 1The Direct Write-Off Method (cont'd.) On August 25, On Your Mark wrote off as uncollec- tible Robert Galvin’s account for $265, Memorandum 170. ANALYSIS + / – 3.Uncollectible Accounts Expense is increased by $265. Accounts Receivable (controlling) and Accounts Receivable—Robert Galvin (subsidiary) are decreased by $265. Business Transaction (cont'd.)

Writing Off an Uncollectible Account (cont'd.) Section 1The Direct Write-Off Method (cont'd.) On August 25, On Your Mark wrote off as uncollec- tible Robert Galvin’s account for $265, Memorandum 170. DEBIT-CREDIT RULE 4.Increases to expense accounts are recorded as debits. Debit Uncollectible Accounts Expense for $ Decreases to asset accounts are recorded as credits. Credit Accounts Receivable (controlling) and Accounts Receivable—Robert Galvin (subsidiary) for $265. Business Transaction (cont'd.)

Writing Off an Uncollectible Account (cont'd.) Section 1The Direct Write-Off Method (cont'd.) On August 25, On Your Mark wrote off as uncollectible Robert Galvin’s account for $265, Memorandum 170. Business Transaction (cont'd.) T ACCOUNTS 6. UncollectibleAccounts Accounts ExpenseReceivable Debit Credit – Debit + Credit – 265 Accounts Receivable Subsidiary Ledger Robert Galvin Debit + Credit – 265

Writing Off an Uncollectible Account (cont'd.) Section 1The Direct Write-Off Method (cont'd.) On August 25, On Your Mark wrote off as uncollec- tible Robert Galvin’s account for $265, Memorandum 170. Business Transaction (cont'd.) JOURNAL ENTRY 7.

Collecting a Written-Off Account  First, the customer’s account is reinstated, or reentered in the accounting records.  Second, the cash receipt is recorded.  First, the customer’s account is reinstated, or reentered in the accounting records.  Second, the cash receipt is recorded. Section 1The Direct Write-Off Method (cont'd.)

Check Your Understanding Explain the use of the direct write-off method of accounting for uncollectible accounts. Section 1The Direct Write-Off Method (cont'd.)