Uncollectible Accounts Receivables

1. Uncollectible Accounts Receivables Chapter 24

2. Uncollectible A/R • Allowance for Uncollectible Accounts • Estimating Uncollectible Accounts

3. Uncollectible Accounts • Although companiesdo thorough credit checks on their customers, it is inevitable that some accounts will never be paid • A/R that cannot be collected is called Uncollectible Accounts • The amount of accounts receivable not collected is recorded in the Uncollectible Accounts Expenseaccount

4. Uncollectible Accounts Expense • An uncollectible amount does not decrease revenue (that is recorded at the time of sale) • The loss is considered a regular expense of doing business • At the end of the fiscal year, a business does not know which customer accounts will become uncollectible, so a business can calculate an estimate amount of uncollectible accounts expense

5. Uncollectible Accounts Estimate • To record estimated uncollectible accounts, an adjusting entry is made • Uncollectible Accounts Expense (debit) & • Allowance for Uncollectible Accounts (credit). • Allowance for Uncollectible Accountsis a contra account (an account that reduces a related account) to Accounts Receivable. Because it is a contra to A/R, it has a normal credit balance.

6. Two Ways to Account • Direct Write-Off Method • Allowance Method

7. 1. Direct Write-Off Method • Used when the business determines the uncollectible will not be paid A/R (controlling/subsidiary: individual A/R) Uncollectible Accounts Expense DR CR – CR – DR + Normal Balance

8. Let’s Figure It Out! • On August 25, 2011, On Your Mark wrote off as uncollectible Galvin’s account for $265, Memo 170. Uncollectible Accounts Expense A/R Subsidiary Ledger Robert Galvin’s A/R

9. Journal Entry

10. Collecting a Direct Write-Off • When someone pays off their uncollectible after it has been written off Uncollectible Accounts Expense A/R (controlling/subsidiary: individual A/R) DR + Normal Balance CR – CR DR

11. Work Together On September 5, OYM received $265 from Mark Galvin, whose account was written off as uncollectible on August 25. Memo 176 and Receipt 1109. Uncollectible Accounts Expense A/R Subsidiary Ledger Robert Galvin’s A/R

12. Journal Entry

13. 2. Allowance Method • Matches uncollectibleswith sales made during the period • Typically a % of sales (revenue) Allowance for Uncollectible Accounts Uncollectible Accounts Expense DR – CR + Normal Balance CR – DR + Normal Balance

14. Another Example: T-Account & Journalize • TK Phones, Inc. estimates their uncollectible accounts at the end of each fiscal period. They use 2% of total sales. Total sales for the current fiscal period were $27,596.00. • What is the amount of the adjustment? • What account is debited? • What account is credited?

15. Exit Slip • What is an a/r that can not be collected called? • What account is debitedwhen an account is written off as uncollectible? • What is the main difference between direct write-off and allowance method for uncollectibles? • How is the Allowance for Uncollectible Accounts classified? • Uncollectible Accounts Expense is listed on what Financial Statement and why?

16. Homework • Look up the Balance Sheet for Cheesecake Factory • Using the BS • Find Net Receivables, and • Calculate the adjustment for uncollectibles, using the allowance method for 2.2% of sales • Set up T-Accounts & Journalize the three years of write offs