0 Glencoe Accounting Unit 5 Chapter 24 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Unit 5 Accounting for Special Procedures Chapter 22Cash Funds Chapter 23Plant Assets and Depreciation Chapter 24Uncollectible Accounts Receivable Chapter 25Inventories Chapter 26Notes Payable and Receivable

1 Glencoe Accounting Unit 5 Chapter 24 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 24 Uncollectible Accounts Receivable What You’ll Learn  Explain methods used to write off uncollectible accounts.  Determine uncollectible accounts receivable.  Use the direct write-off method for uncollectible accounts.  Calculate bad debts expense.  Make an adjusting entry for uncollectible accounts.  Use the allowance method to record uncollectible accounts.  Record the collection of an account previously written off.

2 Glencoe Accounting Unit 5 Chapter 24 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 24 Uncollectible Accounts Receivable What You’ll Learn  Describe two methods to estimate uncollectible accounts expense.  Define the accounting terms introduced in this chapter.

3 Glencoe Accounting Unit 5 Chapter 24 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 24, Section 1 The Direct Write-Off Method What Do You Think? Why do businesses extend credit if they recognize that doing so is risky?

4 Glencoe Accounting Unit 5 Chapter 24 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Main Idea A business using the direct write-off method converts an account receivable to an expense when it becomes clear the customer will not pay the bill. You Will Learn  how and why businesses extend credit.  how to write off an uncollectible account using the direct method. The Direct Write-Off Method SECTION 24.1

5 Glencoe Accounting Unit 5 Chapter 24 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Key Terms  uncollectible account  direct write-off method The Direct Write-Off Method SECTION 24.1

6 Glencoe Accounting Unit 5 Chapter 24 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. 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 usinguncollectible account  the direct write-off method, or  the allowance method. The Direct Write-Off Method SECTION 24.1

7 Glencoe Accounting Unit 5 Chapter 24 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. 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.direct write-off method The Direct Write-Off Method SECTION 24.1

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

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

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

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

12 Glencoe Accounting Unit 5 Chapter 24 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Collecting a Written-Off Account When a written-off account is paid, follow these steps:  Reinstate the customer’s account.  Record the cash receipt. The Direct Write-Off Method SECTION 24.1

13 Glencoe Accounting Unit 5 Chapter 24 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. The Direct Write-Off Method SECTION 24.1

14 Glencoe Accounting Unit 5 Chapter 24 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. The Direct Write-Off Method SECTION 24.1

15 Glencoe Accounting Unit 5 Chapter 24 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. The Direct Write-Off Method SECTION 24.1

16 Glencoe Accounting Unit 5 Chapter 24 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Key Terms Review  uncollectible account An account receivable that the business cannot collect; also called a bad debt.  direct write-off method A procedure for uncollectible accounts receivable; the business removes the uncollectible account from its accounting records when it determines the amount is not going to be paid. The Direct Write-Off Method SECTION 24.1

17 Glencoe Accounting Unit 5 Chapter 24 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 24, Section 2 Uncollectible Accounts Receivable What Do You Think? Why might the allowance method be preferable to the direct write-off method?

18 Glencoe Accounting Unit 5 Chapter 24 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Main Idea A business using the allowance method estimates the bad debt expense and writes off that amount. You Will Learn  why businesses apply the matching principle to accounts receivable.  how businesses use the matching principle to recognize bad debt expense. The Allowance Method SECTION 24.2

19 Glencoe Accounting Unit 5 Chapter 24 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Key Terms  allowance method  book value of accounts receivable The Allowance Method SECTION 24.2

20 Glencoe Accounting Unit 5 Chapter 24 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Matching Uncollectible Accounts Expense with Revenue Businesses that have many charge customers use the allowance method for uncollectible accounts. Under the matching principle, the uncollectible accounts expense should be reported in the same year the sale takes place. To conform to this principle, credit sales are recorded in one year and an estimate of uncollectible accounts expense is recorded in the same year. The Allowance Method SECTION 24.2

21 Glencoe Accounting Unit 5 Chapter 24 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. 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:allowance method  Uncollectible Accounts Expense  Allowance for Uncollectible Accounts The Allowance Method SECTION 24.2

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

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

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

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

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

27 Glencoe Accounting Unit 5 Chapter 24 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Reporting Estimated Uncollectible Amounts on the Financial Statements View the placement on the Uncollectible Accounts Expense account on the income statement. The Allowance Method SECTION 24.2

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

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

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

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

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

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

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

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

36 Glencoe Accounting Unit 5 Chapter 24 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Collecting an Account Written Off by the Allowance Method To post a payment on a written-off account:  reinstate the account as shown on the following slides.  record the cash receipt by debiting Cash in Bank and crediting Accounts Receivable (controlling and subsidiary). The Allowance Method SECTION 24.2

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

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

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

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

41 Glencoe Accounting Unit 5 Chapter 24 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Key Terms Review  allowance method A procedure for uncollectible accounts receivable; the business matches the estimated uncollectible account expense with the sales made during the same period.  book value of accounts receivable The amount the business can reasonable expect to collect from its accounts receivable. The Allowance Method SECTION 24.2

42 Glencoe Accounting Unit 5 Chapter 24 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 24, Section 3 Estimating Uncollectible Accounts Receivable What Do You Think? If you were estimating uncollectible accounts expense for a business, what past information might be useful?

43 Glencoe Accounting Unit 5 Chapter 24 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Main Idea Different methods can be used to estimate the allowance for uncollectible accounts. Two methods are percentage of net sales and aging of accounts receivable. You Will Learn  how to use the percentage of net sales method.  how to use the aging of accounts receivable method. Estimating Uncollectible Accounts Receivable SECTION 24.3

44 Glencoe Accounting Unit 5 Chapter 24 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Key Terms  percentage of net sales method  aging of accounts receivable method Estimating Uncollectible Accounts Receivable SECTION 24.3

45 Glencoe Accounting Unit 5 Chapter 24 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. 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:percentage of net sales method  Determine the percentage.  Calculate net sales.  Multiply net sales by the percentage.  Enter the amount calculated above on the work sheet. Estimating Uncollectible Accounts Receivable SECTION 24.3

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

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

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

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

50 Glencoe Accounting Unit 5 Chapter 24 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Key Terms Review  percentage of net sales method A method of estimating uncollectible accounts expense in which a business assumes that a certain percentage of each year’s net sales will be uncollectible.  aging of accounts receivable method A method of estimating the uncollectible accounts expense in which each customer’s account is classified by age; the age classifications are multiplied by certain percentages; and the total estimated uncollectible amounts are added to determine the end-of-period balance of Allowance for Uncollectible Accounts. Estimating Uncollectible Accounts Receivable SECTION 24.3

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

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

53 Glencoe Accounting Unit 5 Chapter 24 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Question 2 What assumptions are made in using the percentage of sales method and the aging of accounts receivable method in estimating the allowance for uncollectible accounts? Chapter 24 Review CHAPTER 24

54 Glencoe Accounting Unit 5 Chapter 24 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Answer 2 Both methods attempt to predict as closely as possible the amount of uncollectible accounts a business will have in a year. The percentage of sales method assumes that a certain percentage of each year’s net sales will be uncollectible. The aging of accounts receivable method assumes that the longer an account is overdue, the less likely it is to be collected. Chapter 24 Review CHAPTER 24

55 Glencoe Accounting Unit 5 Chapter 24 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Resources Glencoe Accounting Online Learning Center English Glossary Spanish Glossary