Accounting for Uncollectible Accounts

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Accounting for Uncollectible Accounts

• Chapter 7

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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.

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Recording uncollectible accounts expense.

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

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November 15 Wrote off James Nordquists past due
account as uncollectible, 50.00 Memo No. 21
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• 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

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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

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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.

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Step 2 is to then recognize the cash received and
decrease the accounts receivable
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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

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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.

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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.

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Writing off an uncollectible account-allowance
method
January 5. Wrote off Candace Rhodes past due
account as uncollectible, 42.80. Memorandum
No. 71
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
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Direct Write-off method
Allowance Method
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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.

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• 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

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Problems

• 7-1 On computer
• 7-2,3,4,5,6,7