1 / 9

Effective Allowance Method for Uncollectible Accounts

Discover how to record losses from uncollectible accounts using the allowance method, estimating expenses, and maintaining accurate book values to reflect expected collections.

mirandataylor
Download Presentation

Effective Allowance Method for Uncollectible Accounts

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. LESSON 14-4 Planning and Recording an Allowance for Uncollectible Accounts Adjustment

  2. ALLOWANCE METHOD OF RECORDING LOSSES FROM UNCOLLECTIBLE ACCOUNTS • With each sale on account, a business takes a risk that customers will not pay their accounts • Accounts receivable that cannot be collected are called uncollectible accounts • At the end of a fiscal year, a business does not know which customer accounts will become uncollectible • To solve this problem, a business can calculate & record an estimated amount of uncollectible accounts expense. • Estimating uncollectible accounts expense accomplishes 2 objectives: • It reports a balance sheet amount for Accounts Receivable that reflects the amount the business expects to collect in the future. • It recognizes the expense of uncollectible accounts in the same period in which the related revenue is recorded LESSON 14-4

  3. ALLOWANCE METHOD OF RECORDING LOSSES FROM UNCOLLECTIBLE ACCOUNTS • To record estimated uncollectible accounts, an adjusting entry is made affecting 2 accounts: • The estimated amount of uncollectible accounts is debited to Uncollectible Accounts Expense and credited to an account titled Allowance for Uncollectible accounts. • Allowance for Uncollectible Accounts is a contra account to its related asset account, Accounts Receivable • Crediting the estimated value of uncollectible accounts to a contra account is called the allowance method of recording losses from uncollectible account. • The difference between an asset’s account balance & its related contra account balance is called book value LESSON 14-4

  4. ALLOWANCE METHOD OF RECORDING LOSSES FROM UNCOLLECTIBLE ACCOUNTS page 419 LESSON 14-4

  5. Total Saleson Account × Percentage = EstimatedUncollectibleAccounts Expense ESTIMATING UNCOLLECTIBLE ACCOUNTS EXPENSE page 420 • Businesses use a percentage of total sales on account to estimate uncollectible accounts expense • Each sale on account represents a risk of loss from an uncollectible account. A review of Hobby Shack’s previous experience in collecting sales on account shows that actual uncollectible accounts expense has been about 1% of total sales on account. The company’s total sales on account for the year is $124,500.00 $124,500.00 × 1% = $1,245.00 LESSON 14-4

  6. ESTIMATING UNCOLLECTIBLE ACCOUNTS EXPENSE page 420 • At the end of a fiscal period, an adjustment for uncollectible accounts expense is planned on a worksheet. • The allowance for Uncollectible Accounts balance in the Trial Balance Credit column, $127.52 is the allowance estimate from the previous fiscal period that has not yet been identified as uncollectible. LESSON 14-4

  7. 3. Label the two parts with a small letter e in parentheses. 3 3 ANALYZING AND RECORDING AN ADJUSTMENT FOR UNCOLLECTIBLE ACCOUNTS EXPENSE page 421 1 2 1. Enter the estimated uncollectible amount. 2. Enter the same amount in the Adjustments Debit column. LESSON 14-4

  8. Accounts Receivable - Balance of Allowance for Uncollectible Accounts = Book Value of Accounts Receivable ALLOWANCE METHOD OF RECORDING LOSSES FROM UNCOLLECTIBLE ACCOUNTS • The book value of the Accounts Receivable is the difference between the Accounts Receivable and the Allowance for Uncollectible Accounts $14,698.40 - $1,372.52 = $13,325.88 • Hobby Shack estimates that it will collect $13,325.88 from its outstanding accounts receivable LESSON 14-4

  9. TERMS REVIEW page 422 • uncollectible accounts • allowance method of recording losses from uncollectible accounts • book value • book value of accounts receivable LESSON 14-4

More Related