1. Accounting for Uncollectible Accounts
Chapter 7

2. Definition of some terms
Uncollectible accounts – Accounts receivable that cannot be collected.
Sometimes referred to as bad debt.
Writing off an account – when a account is believed to be uncollectible, the account is no longer an asset to the company. The A/R should be canceled and removed from the assets of the business.

3. Recording uncollectible accounts expense.
When the account becomes uncollectible we have to reduce the Accounts receivable and increase the account called Uncollectible accounts expense.

4. November 15 Wrote off James Nordquist’s past due account as uncollectible, $50.00 Memo No. 21
General Journal
Date
Account Title
Doc No.
Post
Ref
Debit
Credit
Nov 15
Uncollectible Accounts Expense
M21 50
Accts Rec./James Nordquist

5. Recording uncollectible accounts expense only when an amount is actually known to be uncollectible is called the DIRECT WRITE-OFF METHOD OF RECORDING LOSSES FROM UNCOLLECTIBLE ACCOUNTS

6. Here are the steps you need to consider to see the whole picture
A person buys something from us on account
Increase accounts receivable
The person does not pay on account
Decrease the accounts receivable and increase uncollectible accounts

7. Now what do we do if this company decides to pay us after we have written them off?
It becomes a two step process.
We must first re-write the accounts back on the books that were previously written off and identify why they are written back on the books.

8. Accts Rec./James Nordquist M54 50
General Journal
Date
Account Title
Doc No.
Post Ref
Debit
Credit
Jan 21
Accts Rec./James Nordquist
M54 50
Collection of Uncoll. Accounts
Step 2 is to then recognize the cash received and decrease the accounts receivable
Cash Receipts Journal
Doc No
Post Ref
General
Account Rec Credit
Sales Tax Payable
Sales Credit
Sales Discount Debit
Cash Credit
Date
Account Title
Debit
Credit
Golf
Tennis
21-Jan
James Norquist
R49 50

9. Section 7-2
Different Methods of Recoding Uncollectible Accounts Expense
Allowance Method
A method that says that there is no way that we know exactly how many customers will not pay but we can estimate or allow a certain amount to be assumed uncollectible.
Two methods
Percentage of sales method
A percentage of each sales dollar will become an uncollectible
Percentage of accounts receivable method
A percentage of acounts receivable at the fiscal year-end will become uncollectible

10. Percentage of Sales Lets pretend
We have seen that over a number of years that .5% of sales has been uncollectible. This will be what we will assume that our uncollectible adjustment will be. And is recorded in our adjustment column of our worksheet.

11. Accounts Receivable method
When we use this method we AGE the accounts receivable. Which means that we look at how old some of the accounts that have not been collected are…… Does that make sense?
Let look at an example.

12. Days Account Balance Past Due
customer
Account Balance
Not Due Yet
Days Account Balance Past Due
1-30
31-60
61-90
over 90
Bill
735 35
700
Dawn
654 54
600
Bob
123
Sue
345
Sally
234 20 14
200
Matt
567 7 60
500
Mike
432
232
Totals
3090
227
360
2345
Percentages
1.1%
4.0%
7.3%
11.7%
75.9%
Age Group
Amount
Percentage
Uncollectible
Not Yet Due
935
1.1%
10.29
1-30
157 4%
62.80
31-60
200
7.3%
146.00
61-90
232
11.70%
27.14
over 90
345
75.90%
261.86
Totals
600.65

13. Writing off an uncollectible account-allowance method
January 5. Wrote off Candace Rhode’s past due account as uncollectible, $ Memorandum No. 71
General Journal
Date
Account Title
Doc
No.
Post
Ref
Debit
Credit
Jan 5
Allowance for Uncollectible Accts
M71
42.8
Accounts Rec./Candace Rhode
REMEMBER THAT WHEN WE USE THE WRITE OFF METHOD WE USE THE UNCOLLECTIBLE ACCOUNTS EXPENSE ACCOUNT, WHEN WE USE THE ALLOWANCE METHOD WE USE THE ACCOUNT CALLED ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS

14. Allowance Method Direct Write-off method General Journal Date
Account Title
Doc No.
Post
Ref
Debit
Credit
Nov 15
Uncollectible Accounts Expense
M21 50
Accts Rec./James Nordquist
Allowance Method
General Journal
Date
Account Title
Doc
No.
Post
Ref
Debit
Credit
Jan 5
Allowance for Uncollectible Accts
M71
42.8
Accounts Rec./Candace Rhode

15. 7-3 A/R Turnover Ratio
The number of times the average amount of accounts receivable is collected during a specified period.
Before we show you how to do the calculation lets make sure we understand what we are trying to do…….

16. We want to find out what our actual Book value of A/R is
We want to find out what our actual Book value of A/R is. By taking the A/R and subtracting out the accounts that we did not receive (Uncollectible accounts)
We do that both with the beginning and ending A/R
Once we determine the ending value for both we add them together and divide by 2 to get the average. (average book value of A/R)
We then divide the Net Sales on Account by the average A/R and that gives us the Ratio.
We then divide 365 days by the ratio and that give us how many days our A/R turns over
Or just look on page 206

17. Problems
7-1 On computer
7-2,3,4,5,6,7