The Direct Write-Off Method SECTION 24.1 Extending Credit Businesses extend credit because they expect to sell more than if they accepted cash only. An uncollectible account or bad debt is an account receivable that the business cannot collect. Businesses account for bad debts by using the direct write-off method, or the allowance method. Glencoe Accounting Unit 5 Chapter 24 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

The Direct Write-Off Method SECTION 24.1 The Direct Write-Off Method The direct write-off method is primarily used by businesses with few credit customers. When it is determined that a customer is not going to pay, the uncollectible account is removed from the records. Glencoe Accounting Unit 5 Chapter 24 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

The Direct Write-Off Method SECTION 24.1 Writing Off an Uncollectible Account Here is an example of writing off an uncollectible account. Glencoe Accounting Unit 5 Chapter 24 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

The Allowance Method The Allowance Method SECTION 24.2 The Allowance Method The allowance method matches the estimated uncollectible accounts expense with sales made during the same period. The estimated uncollectible accounts expense is recorded as an adjustment, which affects two accounts: Uncollectible Accounts Expense Allowance for Uncollectible Accounts Glencoe Accounting Unit 5 Chapter 24 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

The Allowance Method SECTION 24.2 Glencoe Accounting Unit 5 Chapter 24 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

The Allowance Method The Allowance Method SECTION 24.2 The Allowance Method The book value of accounts receivable is the difference between Accounts Receivable and Allowance for Uncollectible Accounts. It is the amount the business can expect to collect from its accounts receivable. Glencoe Accounting Unit 5 Chapter 24 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

The Allowance Method SECTION 24.2 Reporting Estimated Uncollectible Amounts on the Financial Statements Shown is an example of the Allowance for Uncollectible Accounts account on the Balance Sheet. Glencoe Accounting Unit 5 Chapter 24 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

The Allowance Method SECTION 24.2 Journalizing the Adjusting Entry for Uncollectible Accounts The adjusting entries must now be journalized. At the end of the period, Uncollectible Accounts Expense is closed to Income Summary. The balance of Allowance for Uncollectible Accounts is not affected by closing entries. Glencoe Accounting Unit 5 Chapter 24 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

The Allowance Method SECTION 24.2 Journalizing the Adjusting Entry for Uncollectible Accounts Glencoe Accounting Unit 5 Chapter 24 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

The Allowance Method Writing Off Uncollectible Accounts Receivable SECTION 24.2 Writing Off Uncollectible Accounts Receivable The Allowance for Uncollectible Accounts balance is saved until a business dips into it to write off an uncollectible account. The write-off of an account does not affect an expense account because the expense was recorded as an adjustment. Glencoe Accounting Unit 5 Chapter 24 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

The Allowance Method Writing Off Uncollectible Accounts Receivable SECTION 24.2 The Allowance Method Writing Off Uncollectible Accounts Receivable Glencoe Accounting Unit 5 Chapter 24 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

The Allowance Method Writing Off Uncollectible Accounts Receivable SECTION 24.2 Writing Off Uncollectible Accounts Receivable Glencoe Accounting Unit 5 Chapter 24 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

The Allowance Method Writing Off Uncollectible Accounts Receivable SECTION 24.2 Writing Off Uncollectible Accounts Receivable Glencoe Accounting Unit 5 Chapter 24 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

The Allowance Method SECTION 24.2 Collecting an Account Written Off by the Allowance Method Glencoe Accounting Unit 5 Chapter 24 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Estimating Uncollectible Accounts Receivable SECTION 24.3 Percentage of Net Sales Method The percentage of net sales method assumes that a certain percentage of each year’s sales will be uncollectible. To find the adjustment for uncollectible accounts expense: Determine the percentage. Calculate net sales. Multiply net sales by the percentage. Enter the amount calculated above on the work sheet. Glencoe Accounting Unit 5 Chapter 24 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Estimating Uncollectible Accounts Receivable SECTION 24.3 Estimating Uncollectible Accounts Receivable Aging of Accounts Receivable Method The aging of accounts receivable method classifies the accounts receivable according to the number of days each account is past due. This method assumes that the longer an account is overdue, the less likely it is to be collected. Glencoe Accounting Unit 5 Chapter 24 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Estimating Uncollectible Accounts Receivable SECTION 24.3 Aging of Accounts Receivable Method Use these steps to find the adjustment for uncollectible accounts: Classify and group each account according to the number of days it is past due. Use past experience to determine the percentage of each group that will be uncollectible. Multiply the uncollectible amount for each group by the percentage for that group. Add the results for all groups. Enter the estimated uncollectible amount adjusted by any balance in Allowance for Uncollectible Accounts. Glencoe Accounting Unit 5 Chapter 24 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Estimating Uncollectible Accounts Receivable SECTION 24.3 Aging of Accounts Receivable Method Glencoe Accounting Unit 5 Chapter 24 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 24 Review Question 1 Calculate the allowance for uncollectible accounts using the aging of accounts receivable method and the following information: Glencoe Accounting Unit 5 Chapter 24 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 24 Review CHAPTER 24 Answer 1 The allowance for uncollectible accounts is shown below: Glencoe Accounting Unit 5 Chapter 24 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.