3 Why sell on account? Encourage sales Uncollectible account (bad debt) Check credit historyUncollectible account (bad debt)Expense to businessTwo ways to handle uncollectible accountsAllowance MethodDirect Write-Off Method*We will focus on the Allowance Method*
4 Allowance Method CONCEPT: Matching Expenses with Revenue Meets two objectives:Assets not overstated on Balance SheetExpenses not understated on Income Statement
5 Allowance Method (cont.) Businesses estimate uncollectible accounts expense and record as an adjusting entry at the end of the period.Two methods for estimating this expense% of total sales on account% of net sales
6 Total sales on account * Percentage Percent of Sales% of total salesTotal sales on account * Percentage% of net salesNet sales * PercentageNet Sales = Sales – (Sales Discount + Sales Returns & Allowances)
7 Recording Adjusting Entry Debit: Uncollectible Accounts ExpenseCredit: Allowance for Uncollectible Accounts**Contra-asset account to Accounts ReceivableBook Value of Accounts ReceivableAmount business can reasonably expect to receive from all accounts receivableAccts Rec – Allowance for Uncollectible Accts
8 Analyzing and Recording an Adjustment for Uncollectible Accounts Receivable 1321. Enter and label credit amount.2. Enter and label debit amount.3. Record adjusting entry.
9 Problems Complete the following on PAPER: Work Together 17-1 On Your Own 17-1Application 17-1Chapter 17 Study Guide
10 Section 2 – Writing Off and Collecting Uncollectible Accounts Receivable
11 Writing Off an AccountWhen an account has been labeled as uncollectible it must be written-off as an expense of the business.Debit: Allowance for Uncollectible AccountsCredit: Accounts Receivable/CustomerWhen posting, “Written Off” is recorded in the item column.
12 Journalizing Writing Off an Uncollectible Account January 4. Wrote off Metro Food Court’s past-due account as uncollectible, $1, Memorandum No. 3.121. Debit2. Credit and customer’s name
13 Posting an Entry to Write Off an Uncollectible Account Receivable 1. Post the debit amount to general ledger.2. Post the credit amount to general ledger.1233. Post the credit amount to customer account.4. Write Written off in the customer account.4
14 Customer Pays on a Written-Off Account Must do two things:Reopen accountDebit: Accounts Receivable/CustomerCredit: Allowance for Uncollectible AccountsGeneral JournalWhen posting, “Reopen account” is recorded in the Item column.Record paymentDebit: CashCredit: Accounts Receivable/CustomerCash Receipts Journal
15 Reopening An Account Previously Written Off January 30. Received cash in full payment of Metro Food Court’s account, previously written off as uncollectible, $1, Memorandum No. 5 and Receipt No. 12.121. Enter a debit to Accounts Receivable. Place a diagonal line in the Post. Ref. column.2. Enter a credit to Allowance for Uncollectible Accounts.
16 Recording Cash Received for an Account Previously Written Off January 30. Received cash in full payment of Metro Food Court’s account, previously written off as uncollectible, $1, Memorandum No. 5 and Receipt No. 12.
17 Posting Entries for Collecting a Written-off Account Receivable 1. Post the general journal entry to the general ledger.122. Post the debit portion of the general journal entry to the customer account.3. Write the words Reopen account in the Item column of the customer account.4. Post the cash receipts journal entry to the customer account.34
18 Summary of Allowance Method At the end of each fiscal period, uncollectible accounts expense is estimated and adjusting entry is recordedCustomer account is written offIf customer pays after writing off accountReopen accountRecord payment
19 Problems Complete the following on PAPER: Work Together 17-2 On Your Own 17-2Application 17-2Finish Chapter 17 Study Guide