1. © 2014 Cengage Learning. All Rights Reserved. Uncollectible Accounts Receivable Lesson 14-1

2. © 2014 Cengage Learning. All Rights Reserved. Allowance Method of Recording Losses from Uncollectible Accounts ●Uncollectible accounts—Accounts receivable that cannot be collected. Some businesses refer to uncollectible accounts as bad debts. ●Crediting the estimated value of uncollectible accounts to a contra account is called the allowance method of recording losses from uncollectible accounts. SLIDE 2 Lesson 14-1 Continued on the next slide.

3. © 2014 Cengage Learning. All Rights Reserved. Allowance Method of Recording Losses from Uncollectible Accounts ●Book value—The difference between an asset’s account balance and its related contra account balance ●Book value of accounts receivable—The difference between the balance of Accounts Receivable and its contra account, Allowance for Uncollectible Accounts ●Net realizable value—The amount of accounts receivable a business expects to collect SLIDE 3 Lesson 14-1

4. © 2014 Cengage Learning. All Rights Reserved. Methods of Estimating Uncollectible Accounts Receivable ●Two methods are commonly used to estimate uncollectible accounts receivable: ●The percent of sales method assumes that a percent of credit sales will become uncollectible. ●The percent of accounts receivable method uses an analysis of accounts receivable to estimate the amount that will be uncollectible. SLIDE 4 Lesson 14-1

5. © 2014 Cengage Learning. All Rights Reserved. Estimating Uncollectible Accounts Expense ●Aging of accounts receivable—Analyzing accounts receivable according to when they are due SLIDE 5 Lesson 14-1

6. © 2014 Cengage Learning. All Rights Reserved. Accounts Receivable as of December 31, 20-- Customer Account BalanceCurrent Days Account Balance Past Due 1–3031–6061–90Over 90 Belk & Jensen$3,247.36$1,495.18$1,752.18 Edmonds Hospital639.88167.48$195.36$277.04 Lake Automotive3,757.823,151.50606.32 Mason City Schools2,489.64 Skinner College2,578.35$2,578.35 Triangle Health3,154.48 Wells Apartments4,514.281,483.213,031.07 $20,381.81$11,774.01$5,557.05$195.36$277.04$2,578.35 Percent1.00%4.00%12.00%30.00%80.00% Estimating Uncollectible Accounts Expense SLIDE 6 Lesson 14-1 Age GroupAmountPercentUncollectible Current$11,774.011.0%$117.74 1–305,557.054.0%222.28 31–60195.3612.0%23.44 61–90277.0430.0%83.11 Over 902,578.3580.0%2,062.68 $20,381.81$2,509.25 Current Balance of Allowance for Uncollectible Accounts125.15 Estimated Addition to Allowance for Uncollectible Accounts$2,384.10 1 1 Compute the estimate for each age group 2 2 Compute the total estimate Compute the addition to the allowance account 3 3

7. © 2014 Cengage Learning. All Rights Reserved. Adjusting Entry for Allowance for Uncollectible Accounts SLIDE 7 Lesson 14-1 3 3 Account Title 1 1 Write “Adjusting Entries” 5 5 Account Title 4 4 Debit Amount 2 2 Date Accounts Receivable Dec. 31 Bal.20,381.81 Uncollectible Accounts Expense Adj.2,384.10 6 6 Credit Amount Allowance for Uncollectible Accounts Bal. 125.15 Adj.2,384.10 (New Bal.2,509.25)

8. © 2014 Cengage Learning. All Rights Reserved. Questions?