Accounting for Uncollectible Accounts

1. Accounting for Uncollectible Accounts Chapter 7

2. 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.

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

4. November 15 Wrote off James Nordquist’s past due account as uncollectible, $50.00 Memo No. 21

5. 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

6. 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

7. 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.

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

9. 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

10. 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.

11. 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.

13. Writing off an uncollectible account-allowance method January 5. Wrote off Candace Rhode’s 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

14. Direct Write-off method Allowance Method

15. 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…….

16. 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

17. Problems • 7-1 On computer • 7-2,3,4,5,6,7