Presentation on theme: "Allowance for Uncollectible Accounts"— Presentation transcript:
1 Allowance for Uncollectible Accounts Accounting IIAllowance for Uncollectible Accounts
2 Accounts ReceivableWhen customers purchase items on accounts receivable it is unfortunate but there are times when they do not pay the balances due.As accountants we must provide for this when completing the accounting records.We call these accounts uncollectible accountsUncollectible accounts are considered to be an expense of doing business.
3 Allowance Method Large businesses Businesses that sell on credit “Matches” when the sale is made and the revenue recorded with the “uncollectible” expenseBusiness estimates the amount of the accounts receivable balance that will not be collectible.
4 EstimateWhen we estimate we do not know which of the customers will not pay so we establish an allowance for uncollectible accounts receivable.This allowance is based on our knowledge of our historical collection rates.
5 Computing the allowance Percentage of Total Credit SalesThe allowance for uncollectible accounts is computed using a historical percentage that is applied to the total sales on credit.The adjustment to allowance is = to the above, no consideration is given to the balance already in the allowance account.Percentage of Net Sales MethodThe allowance for uncollectible accounts is computed using a percentage based on historical information of the amount of net sales that is usually uncollectible.Total Sales – discounts- returnsThe adjustment to allowance is = to the above, no consideration is given to the balance already in the allowance account.
6 Computing the allowance Aging of Accounts Receivable MethodThis method is based on applying historical percentages to each aging category. The aging categories are based on the age of the account.First - Determining how many days old the a/r isSecond 0- Using a historical percentage of the amount in that category that is generally uncollectibleThe older the account the higher the percentage that is uncollectible.Add all the computed allowances together to determine the total ending allowance amount.Take the amount determined above and subtract the current balance in the allowance account.
7 Entry to record the allowance: Debit Uncollectible account expenseCredit Allowance for uncollectible expense
8 Entry to write off specific account When an account is actually identified for write off the entry is:Debit Allowance for uncollectible accountCredit Accounts Receivable
9 Reinstatement under the allowance method If an account that was written off under the allowance method actually pays the balance that they owed the Accounts receivable must be reinstated.Debit Accounts RecCredit Allowance for uncollectibleDebit CashCredit Accounts Rec
10 Entry to ReinstateThis is the entry when you collect an account that you have previously written off:Debit Accounts ReceivableCredit Uncollectible account expense
11 Entry to record the cash when an account is collected. Entry to record the collection of cash – This entry should be made in the cash receipts journal.Debit Cash in BankCredit Accounts Receivable