Accounting II Chapter 7

1. Accounting IIChapter 7 Accounting for Uncollectible Accounts

2. Chapter Objectives • Define the accounting terms related to uncollectible accounts • Identify accounting concepts and practices related to uncollectible accounts • Calculate and record estimated uncollectible accounts expense using the direct write-off method and the allowance method • Calculate and analyze accounts receivable turnover rates

3. Table of Contents Notes Direct Write Off Method Allowance Write Off Method A/R Ratios Problems Due Home

4. Bad Debts • There are two main ways to write off uncollectible accounts. • Also known as Bad Debts • People owe you money and they are not going to pay (you are pretty sure) • When you realize that you are not going to receive that Accounts Receivable you must write off the account

5. Steps to create better A/R turnover Ratio • Send Statements to customers more often • Not sell on account to customer that has an account for which payment already more than 30 days overdue • Encourage more cash sales • Conduct a more rigorous credit check on new customers.

6. Direct Write Off Method • The Direct Write off Method • Used only when an amount is actually known to be uncollectible. • Useful in small businesses when there are not many accounts receivables • Accounts affected: Accounts Receivable and Uncollectible Accounts Expense

7. Direct Write Off Method Uncollectible Accounts Expense Accounts Receivable Increase the Expense Reduce/Decrease Asset Accounts Receivable Subsidiary Ledger

8. Direct Write Off Method You are going to post this twice. Once to Accounts Rec. Once to James’ Account November 15 Wrote off James Nordquist’s past due account as uncollectible, $50.00 Memorandum No. 21 Do You know the Answer Nov 15 Uncollectible Accounts Expense M12 50.00 Accounts Receivable/James Nordquist’s 50.00

9. Direct Write Off Method Writing An account back on Accounts Receivable Collection of Uncollectible Accounts Decrease the Asset Then You Record the Cash Receipt (In RED) Increase the Revenue Increase the Asset Cash Accounts Receivable Subsidiary Ledger Decrease the Asset Increase the Asset Increase Customers A/R Account

10. You are going to post this twice. Once to Accounts Rec. Once to James’ Account Collecting A Written off Account using Direct Method January 21 Received cash in full payment of James Nordquist’s account, previously written off as uncollectible, $50.00 Memorandum No. 54 and Receipt No. 49 Do You know the Answer Jan 21 Accounts Receivable/James Nordquist M54 50.00 Collection of Uncollectible Accounts 50.00 Writing the account back on James Nordquist R49 50.00 50.00 Recording the Receipt

11. Allowance Method of Recording Uncollectible Accounts Expense • Uses the Matching Expenses with Revenues principal • At the time of sales a business will make an estimate of how much money will not be collected. • Use a Contra Account titled Allowance for Uncollectible Accounts • The above account is an Asset Account

12. Allowance Method of Recording Uncollectible Accounts Expense • Estimates based on past history • Two methods are • Percentage of Sales Method (assumes % of each sale will become uncollectible) • Percentage of Accounts Receivable Method (assumes % of A/R at the end of each period will become uncollectible)

13. Allowance Method Write Off at Year End Allowance for Uncollectible Accounts Uncollectible Accounts Expense Increase the Contra Asset Increase the Expense You will only use this account once per Year. During the year when you write off Individual accounts they will go to reduce

14. Allowance Method Year End Entry Using the Sales Method Calculate the Uncollectible Expenses for the Year with Net Sales $113,285.75. Percentage Estimated to be .5%. Record the expense. (This would be a year End Adjustment on the Worksheet) Do You know the Answer Dec 31 Uncollectible Accounts Expense 566.43 Allowance for Uncollectible Accounts 566.43

15. Writing off an Uncollectible Account the Allowance Method You are going to post this twice. Once to Accounts Rec. Once to Candances’ Account January 5. Wrote off Candance Rhode’s past due account as uncollectible, $42.80. Memorandum No. 71 Do You know the Answer Jan 5 Allowance for Uncollectible Accts M71 42.80 Accounts Rec./Candance Rhode 42.80

16. Write off individual Accounts throughout the year using Allowance Method Allowance for Uncollectible Accounts Accounts Receivable Decrease the Contra Asset Decrease the Asset Accounts Receivable Subsidiary Ledger Decrease Individual Customer Account in A/R subsidiary Ledger

17. You are going to post this twice. Once to AccountsRec. Once to Candance’s Account Collecting A Written off Account using Allowance Method April 5. Received cash in full payment of Candance Rhode’s account, previously written off as uncollectible, $42.50. Memorandum No. 92 and Receipt No. 280 Do You know the Answer Apr 5 Accounts Receivable/Candance Rhode M92 42.80 Allowance for Uncollectible Accounts 42.80 Writing the account back on Candance Rhode R280 42.80 42.80 Recording the Receipt

18. Calculate Adjustments using Aging of Account Receivable $8.734.08 X .1% The Older the Accounts Receivable The less Likely you will ever see the Money At the End of the Year this is the Amount that Should be in the Allowance for Uncollectible Accounts Total of the Row

19. Accounts Receivable Turnover Ratio • Used to compare the ratios against prior years and others in the same industry. • Accounts Receivable Turnover - the number of times the average about of accounts receivable is collected during a specified period. (Higher Better) • Average Number of Days for Payment - (Lower is better)

20. Accounts Receivable Turnover Formula 1st Step: Find Average Book Value of Accounts Receivables: (Beginning A/R - Beginning Allowances for Uncollectible) + (End A/R - Ending Allowances for Uncollectible) = Total Book Values Total Book Values divided by 2 = Avg. Book Value of A/R 2nd Step: Find A/R turnover Ratio Net Sales / Avg. Book Value of A/R = A/R turnover Ratio 3rd Step: Find Average Number of Days for Payment Days in the Year divided by A/R turnover Ratio = Avg. No. Days for Payment

21. Problems to Complete • All Definitions and Audit Your understanding Questions • Work Together/On Your Own 7-1 • Work Together/On Your Own 7-2 • Work Together/On Your Own 7-3 • Application Problems • 7-1, 7-2, 7-3, 7-4, 7-5, 7-6, 7-7 • Questions on Study Guide • Exam Chapter 7