1. Chapter 24 Uncollectible Accounts Receivables

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

3. Uncollectible Accounts Although companies do 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 Expense account

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 Accounts is 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 1. Direct Write-Off Method 2. Allowance Method

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

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 A/R Subsidiary Ledger Robert Galvin’s

9. Journal Entry GENERAL JOURNAL PAGE 13 12 DOC.POST. GENERAL DATE 2011ACCOUNT TITLENO.REF.DEBITCREDIT 1 Adjusting Entry 1 2 Aug25Uncollectible Accounts Expense $265.00 2 3 A/R Robert Galvin M170 $265.00 3 4 4 5 5

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

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 A/R Subsidiary Ledger Robert Galvin’s

12. Journal Entry GENERAL JOURNAL PAGE 14 12 DOC.POST. GENERAL DATE 2011ACCOUNT TITLENO.REF.DEBITCREDIT 1 Sept5A/R Robert Galvin M176 $265.00 1 2 Uncollectible Accounts Expense $265.00 2 3 3 4 4 5 5

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