Allowance for Uncollectible Accounts

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Presentation transcript:

Allowance for Uncollectible Accounts Accounting II Allowance for Uncollectible Accounts

Accounts Receivable When 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 accounts Uncollectible accounts are considered to be an expense of doing business.

Allowance Method Large businesses Businesses that sell on credit “Matches” when the sale is made and the revenue recorded with the “uncollectible” expense Business estimates the amount of the accounts receivable balance that will not be collectible.

Estimate When 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.

Computing the allowance Percentage of Total Credit Sales The 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 Method The 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- returns The adjustment to allowance is = to the above, no consideration is given to the balance already in the allowance account.

Computing the allowance Aging of Accounts Receivable Method This 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 is Second 0- Using a historical percentage of the amount in that category that is generally uncollectible The 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.

Entry to record the allowance: Debit Uncollectible account expense Credit Allowance for uncollectible expense

Entry to write off specific account When an account is actually identified for write off the entry is: Debit Allowance for uncollectible account Credit Accounts Receivable

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 Rec Credit Allowance for uncollectible Debit Cash Credit Accounts Rec

Entry to Reinstate This is the entry when you collect an account that you have previously written off: Debit Accounts Receivable Credit Uncollectible account expense

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 Bank Credit Accounts Receivable