Accounting for Uncollectible Accounts

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Accounting for Uncollectible Accounts

• Chapter 7

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Definition of some terms

• Uncollectible accounts Accounts receivable that
  cannot be collected.
• Sometimes referred to as bad debt.
• Writing off an account when a account is
  believed to be uncollectible, the account is no
  longer an asset to the company. The A/R should
  be canceled and removed from the assets of the
  business.

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Recording uncollectible accounts expense.

• When the account becomes uncollectible we have to
  reduce the Accounts receivable and increase the
  account called Uncollectible accounts expense.

4
November 15 Wrote off James Nordquists past due
account as uncollectible, 50.00 Memo No. 21
General Journal General Journal General Journal General Journal General Journal General Journal General Journal
Date Date Account Title Doc No. Post Ref Debit Credit
Nov 15 Uncollectible Accounts Expense M21   50  
    Accts Rec./James Nordquist       50
             
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• Recording uncollectible accounts expense only
  when an amount is actually known to be
  uncollectible is called the DIRECT WRITE-OFF
  METHOD OF RECORDING LOSSES FROM UNCOLLECTIBLE
  ACCOUNTS

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Here are the steps you need to consider to see
the whole picture

1. A person buys something from us on account
2. Increase accounts receivable
3. The person does not pay on account
4. Decrease the accounts receivable and increase
   uncollectible accounts

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Now what do we do if this company decides to pay
us after we have written them off?

• It becomes a two step process.
• We must first re-write the accounts back on the
  books that were previously written off and
  identify why they are written back on the books.

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General Journal General Journal General Journal General Journal General Journal General Journal General Journal
Date Date Account Title Doc No. Post Ref Debit Credit
Jan 21 Accts Rec./James Nordquist M54   50  
    Collection of Uncoll. Accounts       50
Step 2 is to then recognize the cash received and
decrease the accounts receivable
Cash Receipts Journal Cash Receipts Journal Cash Receipts Journal Cash Receipts Journal Cash Receipts Journal Cash Receipts Journal Cash Receipts Journal Cash Receipts Journal Cash Receipts Journal Cash Receipts Journal Cash Receipts Journal Cash Receipts Journal Cash Receipts Journal Cash Receipts Journal
    Doc No Post Ref General General Account Rec Credit Sales Tax Payable Sales Tax Payable Sales Credit Sales Credit Sales Discount Debit Sales Discount Debit Cash Credit
Date Account Title Doc No Post Ref Debit Credit Account Rec Credit Debit Credit Golf Tennis Golf Tennis Cash Credit
21-Jan James Norquist R49       50         50
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Section 7-2

• Different Methods of Recoding Uncollectible
  Accounts Expense
• Allowance Method
• A method that says that there is no way that we
  know exactly how many customers will not pay but
  we can estimate or allow a certain amount to be
  assumed uncollectible.
• Two methods
• Percentage of sales method
• A percentage of each sales dollar will become an
  uncollectible
• Percentage of accounts receivable method
• A percentage of acounts receivable at the fiscal
  year-end will become uncollectible

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Percentage of Sales

• Lets pretend
• We have seen that over a number of years that .5
  of sales has been uncollectible. This will be
  what we will assume that our uncollectible
  adjustment will be. And is recorded in our
  adjustment column of our worksheet.

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Accounts Receivable method

• When we use this method we AGE the accounts
  receivable. Which means that we look at how old
  some of the accounts that have not been collected
  are Does that make sense?
• Let look at an example.

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customer Account Balance Not Due Yet Days Account Balance Past Due Days Account Balance Past Due Days Account Balance Past Due Days Account Balance Past Due
      1-30 31-60 61-90 over 90
Bill 735 35       700
Dawn 654       54 600
Bob 123   123      
Sue 345         345
Sally 234   20 14 200
Matt 567     7 60 500
Mike 432     200 232  
Totals 3090 35 123 227 360 2345
Percentages   1.1 4.0 7.3 11.7 75.9
Age Group Amount Percentage Uncollectible
Not Yet Due 935 1.1 10.29
1-30 157 4 62.80
31-60 200 7.3 146.00
61-90 232 11.70 27.14
over 90 345 75.90 261.86
Totals     600.65
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Writing off an uncollectible account-allowance
method
January 5. Wrote off Candace Rhodes past due
account as uncollectible, 42.80. Memorandum
No. 71
General Journal General Journal General Journal General Journal General Journal General Journal General Journal
Date Date Account Title Doc No. Post Ref Debit Credit
Jan 5 Allowance for Uncollectible Accts M71   42.8  
    Accounts Rec./Candace Rhode       42.8
REMEMBER THAT WHEN WE USE THE WRITE OFF METHOD WE
USE THE UNCOLLECTIBLE ACCOUNTS EXPENSE ACCOUNT,
WHEN WE USE THE ALLOWANCE METHOD WE USE THE
ACCOUNT CALLED ALLOWANCE FOR UNCOLLECTIBLE
ACCOUNTS
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Direct Write-off method
General Journal General Journal General Journal General Journal General Journal General Journal General Journal
Date Date Account Title Doc No. Post Ref Debit Credit
Nov 15 Uncollectible Accounts Expense M21   50  
    Accts Rec./James Nordquist       50
             
Allowance Method
General Journal General Journal General Journal General Journal General Journal General Journal General Journal
Date Date Account Title Doc No. Post Ref Debit Credit
Jan 5 Allowance for Uncollectible Accts M71   42.8  
    Accounts Rec./Candace Rhode       42.8
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7-3 A/R Turnover Ratio

• The number of times the average amount of
  accounts receivable is collected during a
  specified period.
• Before we show you how to do the calculation lets
  make sure we understand what we are trying to
  do.

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1. We want to find out what our actual Book value of
   A/R is. By taking the A/R and subtracting out
   the accounts that we did not receive
   (Uncollectible accounts)
2. We do that both with the beginning and ending A/R
3. Once we determine the ending value for both we
   add them together and divide by 2 to get the
   average. (average book value of A/R)
4. We then divide the Net Sales on Account by the
   average A/R and that gives us the Ratio.
5. We then divide 365 days by the ratio and that
   give us how many days our A/R turns over
6. Or just look on page 206

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Problems

• 7-1 On computer
• 7-2,3,4,5,6,7