CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 14-4 Planning and Recording an Allowance for Uncollectible Accounts Adjustment

CENTURY 21 ACCOUNTING © Thomson/South-Western With each sale on account, a business takes a risk that customers will not pay their accounts Accounts receivable that cannot be collected are called uncollectible accounts At the end of a fiscal year, a business does not know which customer accounts will become uncollectible To solve this problem, a business can calculate & record an estimated amount of uncollectible accounts expense. Estimating uncollectible accounts expense accomplishes 2 objectives: It reports a balance sheet amount for Accounts Receivable that reflects the amount the business expects to collect in the future. It recognizes the expense of uncollectible accounts in the same period in which the related revenue is recorded 2 LESSON 14-4 ALLOWANCE METHOD OF RECORDING LOSSES FROM UNCOLLECTIBLE ACCOUNTS

CENTURY 21 ACCOUNTING © Thomson/South-Western To record estimated uncollectible accounts, an adjusting entry is made affecting 2 accounts: The estimated amount of uncollectible accounts is debited to Uncollectible Accounts Expense and credited to an account titled Allowance for Uncollectible accounts. Allowance for Uncollectible Accounts is a contra account to its related asset account, Accounts Receivable Crediting the estimated value of uncollectible accounts to a contra account is called the allowance method of recording losses from uncollectible account. The difference between an asset’s account balance & its related contra account balance is called book value 3 LESSON 14-4 ALLOWANCE METHOD OF RECORDING LOSSES FROM UNCOLLECTIBLE ACCOUNTS

CENTURY 21 ACCOUNTING © Thomson/South-Western 4 LESSON 14-4 ALLOWANCE METHOD OF RECORDING LOSSES FROM UNCOLLECTIBLE ACCOUNTS page 419

CENTURY 21 ACCOUNTING © Thomson/South-Western 5 LESSON 14-4 Estimated Uncollectible Accounts Expense =Percentage× Total Sales on Account $1,245.00=1%×$124, ESTIMATING UNCOLLECTIBLE ACCOUNTS EXPENSE page 420  Businesses use a percentage of total sales on account to estimate uncollectible accounts expense  Each sale on account represents a risk of loss from an uncollectible account. A review of Hobby Shack’s previous experience in collecting sales on account shows that actual uncollectible accounts expense has been about 1% of total sales on account. The company’s total sales on account for the year is $124,500.00

CENTURY 21 ACCOUNTING © Thomson/South-Western 6 LESSON 14-4 ESTIMATING UNCOLLECTIBLE ACCOUNTS EXPENSE page 420  At the end of a fiscal period, an adjustment for uncollectible accounts expense is planned on a worksheet.  The allowance for Uncollectible Accounts balance in the Trial Balance Credit column, $ is the allowance estimate from the previous fiscal period that has not yet been identified as uncollectible.

CENTURY 21 ACCOUNTING © Thomson/South-Western 7 LESSON Enter the estimated uncollectible amount. ANALYZING AND RECORDING AN ADJUSTMENT FOR UNCOLLECTIBLE ACCOUNTS EXPENSE 3.Label the two parts with a small letter e in parentheses page Enter the same amount in the Adjustments Debit column.

CENTURY 21 ACCOUNTING © Thomson/South-Western The book value of the Accounts Receivable is the difference between the Accounts Receivable and the Allowance for Uncollectible Accounts 8 LESSON 14-4 ALLOWANCE METHOD OF RECORDING LOSSES FROM UNCOLLECTIBLE ACCOUNTS Book Value of Accounts Receivable = Balance of Allowance for Uncollectible Accounts - Accounts Receivable $13,325.88=$1, $14, Hobby Shack estimates that it will collect $13, from its outstanding accounts receivable

CENTURY 21 ACCOUNTING © Thomson/South-Western 9 LESSON 14-4 TERMS REVIEW uncollectible accounts allowance method of recording losses from uncollectible accounts book value book value of accounts receivable page 422