Accounting 3

1. Accounting 3 Chapter 20 Section 1

2. Uncollectible Accounts • Even though companies do thorough credit checks on their customers, it is inevitable that some accounts will never be paid. • Accounts receivable that cannot be collected are called Uncollectible Accounts. • The amount of accounts receivable not collected is recorded as an expense in the Uncollectible Accounts Expense account.

3. Uncollectible Accounts Expense • An uncollectible amount does not decrease revenue (that is recorded at the time of sale). • Instead, the loss is considered a regular expense of doing business. • At the end of the fiscal year, a business does not know which customer accounts will become uncollectible, so a business can calculate an estimate amount of uncollectible accounts expense.

4. Uncollectible Accounts Estimate • Estimating uncollectible accounts expense does two things: • Reports a balance sheet amount for Accounts Receivable that reflects the amount the business expects to collect in the future. • Recognizes the expense of uncollectible accounts in the same period in which the related revenue is recorded.

5. Uncollectible Accounts Estimate • To record estimated uncollectible accounts, an adjusting entry is made affecting Uncollectible Accounts Expense (debit) and Allowance for Uncollectible Accounts (credit). • Allowance for Uncollectible Accounts is a contra account (an account that reduces a related account) to Accounts Receivable. Because it is a contra to AR, it has a normal credit balance.

6. Book Value • The difference between an asset’s account balance and its related contra account balance is called Book Value. • The difference between Accounts Receivable and Allowance for Uncollectible Accounts is Book Value of Accounts Receivable. • In other words, the book value is the amount the company expects to receive, not the full amount that is recorded in the books.

7. Estimating Uncollectible Accounts Expense • Many businesses use a percentage of sales on account to estimate uncollectible accounts expense. • The formula to use for this is: • Total Sales on Account x Percentage = Estimated Uncollectible Accounts Expense • Example: A company has determined that 1% of sales on account will be uncollectible. Their total sales on account for the fiscal period was $982,800.00. • (TSA) $982,000.00 x 1% = (EUAE) $9828.00

8. Analyzing and Journalizing an Adjustment for Uncollectible Accounts Expense • With other adjusting entries we decreased the asset account by crediting and increased the expense account by debiting. • With Allowance for Uncollectible Accounts and Uncollectible Accounts Expense, we want to increase both. • We want to increase AUA to show that we are assuming more money will be uncollectible. Because it has a normal credit balance, a credit in the adjustment columns of a worksheet is the appropriate action. • Because UAE is an expense, increasing with a debit in the adjustment columns will be the appropriate action. • The adjustment will be done in visual steps on the next slide. The journalizing of the adjusting entry will be shown on the slide after the worksheet.

9. Account Title Trial Balance Adjustments Debit Credit Debit Credit Winning Edge Worksheet For Year Ended December 31, 2007 Allowances for Uncollectible Accounts 3 2 0 00 (b) 9 8 2 0 00 Uncollectible Accounts Expense (b) 9 8 2 0 00 The amount in the Trial Balance column is the amount estimated in the previous fiscal period that has not yet been identified as uncollectible. In other words they aren’t sure what to call it yet.

10. General Journal Page ___ Doc. No. Post Ref. Date Account Title Debit Credit 15 Adjusting Entries 31 Uncollectible Accounts Expense 9 8 2 8 00 Allowance for Uncollectible Accts 9 8 2 8 00

11. Posting an Adjusting Entry for Uncollectible Accounts Expense • The posting for this adjusting entry is not any different from any other adjusting entry we have ever done. • The debit and credit go into their respective accounts in the general ledger. • Do not forget posting references in the ledger and back on the journal.

12. Finding Book Value of Accounts Receivable • Once posting of the previous adjusting entry has been completed, you can find the book value of accounts receivable. • The formula to do so is: • Accounts Receivable – Balance of Allowance for Uncollectible Accounts = Book Value of Accounts Receivable. • In our example AR is $72,458.00. AUA is $10,148.00. So… • $72,458.00 - $10, 148.00 = $62,310.00 (BVAR)

13. Worksheet Account Title Trial Balance Adjustments Debit Credit Debit Credit Work Together p. 530Worksheet on slide 13, General Journal on slide 14, Postings will be hyperlinked from General Journal Velson Company For Year Ended December 31, 2007 Allowance for Uncollectible Accounts 8 5 3 00 (b)6 4 5 6 00 Uncollectible Accounts Expense (b)6 4 5 6 00

14. General Journal Page ___ Doc. No. Post Ref. Date Account Title Debit Credit 13 Adjusting Entries 31 Uncollectible Accounts Expense 6165 6 4 5 6 00 Allowance for Uncollectible Accts 1130 6 4 5 6 00 Assignment

15. General Ledger Account Account Acct No. Acct No. Post Ref Post Ref Date Date Item Item Debit Debit Credit Credit BALANCE BALANCE DEBIT DEBIT CREDIT CREDIT Accounts Receivable 1125 Dec 31 S26 54 3 5 1 00 893 3 6 4 00 31 CR24 45 6 8 4 00 847 6 8 0 00 Allowance for Uncollectible Accounts 1130 Dec 28 G12 1 4 6 00 8 5 3 00 31 G13 6 4 5 6 00 7 3 0 9 00

16. General Ledger Account Acct No. Post Ref Date Item Debit Credit BALANCE DEBIT CREDIT Uncollectible Accounts Expense 6165 Dec 31 G13 6 4 5 6 00 6 4 5 6 00

17. Assignment • Do Application 20-1 by hand. • Turn it into Mrs. Middleton. • Move on to Section 2.