Chapter 8- Receivables
UNCOLLECTIBLE ACCOUNTS - Because of errors in judgment by credit department
or unexpected developments.
-
Each year uncollectible accounts expense is estimated and reflected in the year
end balance sheet and income statement to fulfill the Matching Principle.
ALLOWANCE FOR DOUBTFUL ACCOUNTS (P.361)
-
the account to be credited when estimating uncollectible accounts
A Contra-Asset-Account
Accountants try to be conservative in their estimation of assets (report assets at lower end
range of reasonable values.)
~Principle of Conservatism~
3 METHODS OF ACCOUNTING FOR UNCOLLECTIBLE ACCOUNTS
1. Balance sheet (p. 365- Aging A/R)
2. Income Statement (p.367- % of net sales)
3. Direct Write off (p.367)
ADJUSTING ENTRY TO RECORD UNCOLLECTIBLE ASSETS (P.360)
Uncollectible Accounts Expense 10,000
Allowance for doubtful Accounts 10,000
To record the portion of total A/R estimated to be uncollectible.
“BALANCE SHEET” APPROACH

This method emphasizes the proper B/S valuation

Key factor in the B/S approach is an “aging” of A/R

“Aging” means classifying each A/R according to its age.

This analysis of A/R gives management a useful picture of the status of
collections and probabilities of credit losses

Longer past due, more likelihood of not being collected

Credit manager uses this aging schedule to estimate the percentage of credit losses
likely to occur in each age group of A/R, and the resulting uncollectible portions
for all age groups. This determines the required balance in the allowance for
doubtful accounts. This account is then adjusted to the required balance
Ex.
A/R - $100,000 at Dec. 31
-$5,680 estimated to be uncollectible
-$4,000 balance (CR) in account
Allowance for Doubtful Accounts
-Month end adjusting entry should be $1680
Uncollectible Accounts Expense
Allowance for Doubtful Accounts
1680
1680
To increase allowance for Doubtful Accounts to $5680 from $4000
WRITING OFF AN UNCOLLECTIBLE A/R
-
When an A/R from a specific customer is determined to be uncollectible.
ENTRY:
DR
Allowance for Doubtful Accounts
CR
A/R – Jim Smith
NB:*
xx
xx
DR is to the Allowance for Doubtful Account NOT to uncollectible
Account expense!
The expense occurs at the end of each accounting period and is an estimate for the
uncollectible accounts for the forthcoming year. When an A/R actually is determined to
be worthless, this is just confirming our previous ESTIMATE of the EXPENSE – We
must NOT expense the amount again!
-
If estimates > write-offs, Allowance for Doubtful Accounts will show a CR
balance.
If estimates < write-offs, Allowance for Doubtful Accounts will show a temporary
DR balance until the end of the period.
The net value of receivables is unchanged by write-offs, see p. 363.
RECOVERY OF A/R PREVIOUSLY WRITTEN OFF
1. Reinstate Asset (A/R):
DR
A/R – Jim Smith
CR
Allowance for Doubtful A/Cs
xx
xx
2. Separate entry in cash receipts journal to record collection of A/R:
DR
Cash
CR
xx
A/R – Jim Smith
xx
INCOME STATEMENT APPROACH
-
Ex.
Focuses on estimating the uncollectible accounts EXPENSE for the period, rather
than adjusting an asset account to a required balance.
Uncollectable account expense is ESTIMATED at some % OF NET SALES.
The adjusting entry is made in full amount of the estimated expense, without
regard for current balance in the Allowance for Doubtful Accounts.
Net Credit Sales = $150,000
% of credit sales uncollectible = 2%
ENTRY AT MONTH END
DR
Uncollectable A/C expense 3,000
CR
Allowance for Doubtful A/Cs
3,000
To record uncollectable Account Expense, estimated at 2% of CR sales (150,000 X 0.02)