Accounting Chapter 20: Accounting for Uncollectible Accounts

Chapter 20: Accounting for Uncollectible Accounts Receivable
Uncollectible accounts: accounts receivable that cannot be collected
If a business fails to collect from a customer, the business loses part of
that asset Accounts Receivable
Amount of the accounts receivable not collected is recorded as an
expense in an account called Uncollectible Accounts Expense
An uncollectible amount does not decrease revenue – the loss is
considered a regular expense of doing business
Failing to collect an account does not cancel the sale – it is simply an
Section 20-1
At the end of the fiscal period, a business does not know which or how
many accounts will be uncollectible
A business will estimate an uncollectible accounts expense
His estimation accomplishes two things: reports a balance sheet Accounts
Receivable amount the business expects to collect and recognizes the
expense of uncollectible accounts in same period in which the related
revenue is recorded
Need to make an adjusting entry – debit Uncollectible Accounts Expense
and credit Allowance for Uncollectible Accounts for the estimated amount
of uncollectible accounts
Contra account: an account that reduces a related account
Allowance for Uncollectible Accounts is a contra account to the related
asset account Accounts Receivable
Allowance method of recording losses from uncollectible
accounts: crediting the estimated value of uncollectible accounts to a
contra account
Book Value: the difference between an asset’s account balance and its
related contra account balance
Book value of accounts receivable: the difference between the
balance of Accounts Receivable and its contra account, Allowance for
Uncollectible Accounts – this is reported on the balance sheet and
represents the total amount of accounts receivable the business expects
to collect in the future
A contra account is usually assigned the next number of the account
number sequence after its related account in the chart of accounts
Uncollectible Accounts Expense – debit increase and credits decrease
Accounts Receivable – debits increase and credits decrease
Allowance for Uncollectible Accounts – debits decrease and credits
Use a percentage of total sales on account to estimate uncollectible
accounts expense – assumes a portion of every sales on account dollar
will become uncollectible
o Total sales on account x percentage (based on past experience) =
estimated uncollectible accounts expense
Analyzing and journalizing an adjustment for uncollectible accounts
o Enter estimated uncollectible amount in adjustments credit column
in the Allowance for Uncollectible Accounts line and label with a
small letter
o Enter same amount in debit column of Uncollectible Accounts
Expense line in adjustments columns and label
o Use debit and credit amounts to record in general journal and then
post to general ledger accounts
To determine book value of Accounts Receivable
o Accounts Receivable – balance of Allowance for Uncollectible
Accounts = book value of Accounts Receivable
Section 20-2
Writing off an account – canceling the balance of a customer account
because the customer does not pay
Journal entry to write off in General Journal
o Debit Allowance for Uncollectible Accounts
o Credit Accounts Receivable and individual customer account
o Post the debits an credits and also write “Written Off” on line of
customer account
Reopen an account that was written off in General Journal
o Debit Accounts Receivable and individual customer account
o Credit Allowance for Uncollectible Accounts
o Also need to record the cash received in the Cash Receipts Journal
– need to credit Accounts Receivable and debit cash with
customer’s name entered in account title
Post entries for collecting a previously written off account receivable
o Post General Journal entry to general ledger
o Post debit of General Journal entry to customer account
o Write “Reopen account” in customer account
o Post cash receipts journal to customer account