Accounting 3
Chapter 20
Section 1
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.
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.
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.
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.
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.
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
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.
Winning Edge
Worksheet
For Year Ended December 31, 2007
Account Title
Allowances for Uncollectible Accounts
Uncollectible Accounts Expense
Trial Balance
Adjustments
Debit
Credit
3
2 0
Debit
Credit
00
(b) 9 8 2 0 00
(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.
General Journal
Date
Account Title
Doc.
Post
No.
Ref.
Page 15
___
Debit
Credit
Adjusting Entries
31 Uncollectible Accounts Expense
Allowance for Uncollectible Accts
9 8
2 8 00
9 8 2
8 00
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.
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)
Work Together p. 530
Worksheet on slide 13, General Journal on slide 14, Postings will be
hyperlinked from General Journal
Velson Company
Worksheet
For Year Ended December 31, 2007
Account Title
Allowance for Uncollectible Accounts
Uncollectible Accounts Expense
Trial Balance
Adjustments
Debit
Credit
8
Debit
5 3 00
Credit
(b)6 4 5
(b)6 4 5 6 00
6 00
General Journal
Date
Account Title
Doc.
Post
No.
Ref.
13
Page ___
Debit
Credit
Adjusting Entries
31 Uncollectible Accounts Expense
Allowance for Uncollectible Accts
6165
1130
6 4
5 6 00
6 4 5
6 00
Assignment
General Ledger
Account
Date
Accounts Receivable
Item
Dec 31
Date
Ref
S26
31
Account
Post
Acct No.
Debit
Credit
54 3 5 1 00
CR24
BALANCE
DEBIT
CREDIT
893 3 6 4 00
45 6 8 4 00
847 6 8 0 00
Allowance for Uncollectible Accounts
Item
Post
Ref
Dec 28
G12
31
G13
Debit
1125
Credit
1 4 6 00
Acct No.
1130
BALANCE
DEBIT
CREDIT
8 5 3 00
6 4 5 6 00
7 3 0 9 00
General Ledger
Account
Date
Dec 31
Uncollectible Accounts Expense
Item
Post
Ref
G13
Debit
6 4 5 6 00
Acct No.
Credit
BALANCE
DEBIT
6 4 5 6 00
CREDIT
6165
Assignment
Do Application 20-1 by hand.
Turn it into Mrs. Middleton.
Move on to Section 2.