A business using the direct writeoff method to

A business using the direct write-off method to write off uncollectible accounts converts an account receivable to an expense when it become clear the customer will not pay the bill. A business using the allowance method estimates the bad debt expense and writes off that amount. Glencoe Accounting Copyright © by The Mc. Graw-Hill Companies, Inc. All rights reserved.

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. Describe two methods to estimate uncollectible accounts expense. Glencoe Accounting Copyright © by The Mc. Graw-Hill Companies, Inc. All rights reserved.

Section 24. 1 The Direct Write-Off Method Key Terms uncollectible account direct write-off method

Extending Credit Section 24. 1 The Direct Write-Off Methods for Dealing with an Uncollectible Account Direct Write-Off Method uncollectible account An account receivable that the business cannot collect; also called a bad debt. Glencoe Accounting Allowance Method 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. Copyright © by The Mc. Graw-Hill Companies, Inc. All rights reserved.

The Direct Write-Off Method Section 24. 1 The Direct Write-Off Method Writing Off an Uncollectible Account Business Transaction On August 25, 2013 The Starting Line wrote off as uncollectible Galvin’s account for $265, Memorandum 170. See page 702 Glencoe Accounting Copyright © by The Mc. Graw-Hill Companies, Inc. All rights reserved.

The Direct Write-Off Method Section 24. 1 The Direct Write-Off Method When a Written-Off Account Is Paid: Reinstate the customer’s account. Record the cash receipt. Glencoe Accounting Copyright © by The Mc. Graw-Hill Companies, Inc. All rights reserved.

The Direct Write-Off Method Section 24. 1 The Direct Write-Off Method Collecting a Written-Off Account Business Transaction On September 5 The Starting Line received $265 from Robert Galvin, whose account was written off as uncollectible on August 25, Memorandum 176 and Receipt 1109. First reinstate the account receivable. See pages 703– 704 Glencoe Accounting Copyright © by The Mc. Graw-Hill Companies, Inc. All rights reserved.

Section 24. 2 The Allowance Method Key Terms allowance method book value of accounts

Matching Uncollectible Accounts Expense with Revenue Section 24. 2 The Allowance Method 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. Glencoe Accounting Copyright © by The Mc. Graw-Hill Companies, Inc. All rights reserved.

The Allowance Method Section 24. 2 The Allowance Method What Is the Allowance Method? allowance method A procedure for uncollectible accounts receivable; the business matches the estimated uncollectible account expense with the sales made during the same period. Glencoe Accounting Copyright © by The Mc. Graw-Hill Companies, Inc. All rights reserved.

The Allowance Method Section 24. 2 The Allowance Method The estimated uncollectible Uncollectible Accounts Expense accounts expense is recorded as an adjustment, which affects two accounts: Glencoe Accounting Allowance for Uncollectible Accounts Copyright © by The Mc. Graw-Hill Companies, Inc. All rights reserved.

The Allowance Method Section 24. 2 The Allowance Method Adjustment On December 31 The Starting Line estimates its uncollectible accounts expense for the year ended December 31 to be $1, 350. (Various methods are used to estimate uncollectible accounts expense. ) See page 708 Glencoe Accounting Copyright © by The Mc. Graw-Hill Companies, Inc. All rights reserved.

The Allowance Method Section 24. 2 The Allowance Method The book value of accounts receivable is the difference between Accounts Receivable and Allowance for Uncollectible Accounts. book value of accounts receivable The amount the business can reasonable expect to collect from its accounts receivable. Glencoe Accounting Copyright © by The Mc. Graw-Hill Companies, Inc. All rights reserved.

The Allowance Method Section 24. 2 The Allowance Method See page 709 Uncollectible Accounts

The Allowance Method Section 24. 2 The Allowance Method Allowance for Uncollectible Accounts on the Balance Sheet See page 709 Glencoe Accounting Copyright © by The Mc. Graw-Hill Companies, Inc. All rights reserved.

The Allowance Method Section 24. 2 The Allowance Method 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. Glencoe Accounting Copyright © by The Mc. Graw-Hill Companies, Inc. All rights reserved.

The Allowance Method Section 24. 2 The Allowance Method Journalizing the Adjusting Entry for Uncollectible Accounts See page 710 Glencoe Accounting Copyright © by The Mc. Graw-Hill Companies, Inc. All rights reserved.

The Allowance Method Section 24. 2 The Allowance Method 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. Glencoe Accounting Copyright © by The Mc. Graw-Hill Companies, Inc. All rights reserved.

The Allowance Method Section 24. 2 The Allowance Method Business Transaction On April 18 after many attempts to collect the amount owed, The Starting Line decides to write off the account of Megan Sullivan for $150, Memorandum 236. See page 711 Glencoe Accounting Copyright © by The Mc. Graw-Hill Companies, Inc. All rights reserved.

The Allowance Method Section 24. 2 The Allowance Method Business Transaction On April 18 after many attempts to collect the amount owed, The Starting Line decides to write off the account of Megan Sullivan for $150, Memorandum 236. See pages 711– 712 Glencoe Accounting Copyright © by The Mc. Graw-Hill Companies, Inc. All rights reserved.

The Allowance Method Section 24. 2 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). Glencoe Accounting Copyright © by The Mc. Graw-Hill Companies, Inc. All rights reserved.

The Allowance Method Section 24. 2 The Allowance Method Business Transaction On November 19 The Starting Line received a check for $150 from Megan Sullivan, whose account was written off April 18, Memorandum 294 and Receipt 2243. See pages 712– 713 Glencoe Accounting Copyright © by The Mc. Graw-Hill Companies, Inc. All rights reserved.

Section 24. 3 Estimating Uncollectible Accounts Receivable Key Terms percentage of net sales method aging of accounts receivable method Glencoe Accounting Copyright © by The Mc. Graw-Hill Companies, Inc. All rights reserved.

Percentage of Net Sales Method Section 24. 3 Estimating Uncollectible Accounts Receivable What Is Percentage of Net Sales Method? 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. Glencoe Accounting Copyright © by The Mc. Graw-Hill Companies, Inc. All rights reserved.

Percentage of Net Sales Method Section 24. 3 Estimating Uncollectible Accounts Receivable Determine the percentage. Finding the adjustment for uncollectible accounts expense Calculate net sales. Multiply net sales by the percentage. Enter the amount calculated above on the work sheet. Glencoe Accounting Copyright © by The Mc. Graw-Hill Companies, Inc. All rights reserved.

Aging of Accounts Receivable Method Section 24. 3 Estimating Uncollectible Accounts Receivable What Is the Aging of Accounts Receivable Method? 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-ofperiod balance of Allowance for Uncollectible Accounts. Glencoe Accounting Copyright © by The Mc. Graw-Hill Companies, Inc. All rights reserved.

Aging of Accounts Receivable Method Section 24. 3 Estimating Uncollectible Accounts Receivable Steps for Finding the Adjustments for Uncollectible Accounts Expense 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. Glencoe Accounting Copyright © by The Mc. Graw-Hill Companies, Inc. All rights reserved.

Aging of Accounts Receivable Method Section 24. 3 Estimating Uncollectible Accounts Receivable See page

Question 1 Calculate the allowance for uncollectible accounts using the aging of accounts receivable method and the following information: $ 56 30 65 80 200 $ 431 Glencoe Accounting Copyright © by The Mc. Graw-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? 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. Glencoe Accounting Copyright © by The Mc. Graw-Hill Companies, Inc. All rights reserved.

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