15-1 1-1 McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
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Transcript of 15-1 1-1 McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
15-2
Accounts Receivable and Uncollectible Accounts
Accounts Receivable and Uncollectible Accounts Section 1: The Allowance Method Of
Accounting For Uncollectible Accounts
Chapter
15
Section Objectives
1. Record the estimated expense from uncollectible accounts receivable using the allowance method.
2. Charge off uncollectible accounts using the allowance method.3. Record the collection of accounts previously written off using the allowance method.
15-3
Methods used for writing off accounts that are determined to be uncollectible include the:
Allowance Method
Direct Charge-Off Method
Losses from uncollectible accounts are a normal cost of doing business.
Bad Debts
15-4
Allowance Method
Estimates losses from uncollectible accounts.
Matches uncollectible accounts expense to sales.
Uses a valuation account (Allowance for Doubtful Accounts), a contra asset account which reduces the amount of accounts receivable shown on the balance sheet to its “net realizable value.”
15-5
• The direct charge-off method is the method of recording uncollectible account losses as they occur.
• It is also the method used for tax purposes as the Allowance Method is not allowed since it would result in an estimated expense on the tax return.
ANSWER:
QUESTION:
What is the direct charge-off method?
15-6
2012 Debit Credit
Dec 31 Uncollectible Accounts Expense 1900.00
Allowance for Doubtful Accounts 1900.00
To record estimate of bad debts expected
Recording the adjusting entry to record Uncollectible Accounts Expense is based on an estimate of bad debts for the period
Using the Allowance Method
15-7
Allowance for Doubtful Accounts
Is a Contra-asset account
Is reported as a subtraction from the Accounts Receivable account on the Balance Sheet
Contains the estimate of accounts receivable deemed uncollectible
Uncollectible Accounts Expense
Is reported on the Income Statement as an expense account
Allowance Method of recording bad debts uses two new accounts:
15-8
Current Assets:Cash $ 9,320
Accounts Receivable $46,400
Less Allowance for Doubtful Accounts 1,900 $44,500
•On the Balance Sheet the balance in the Allowance account is subtracted from the balance in Accounts Receivable
•$44,500 is the amount actually expected to be collected from customers
Kathy’s Kitchens
Balance Sheet (partial)
December 31, 2012
15-9
Percentage of net credit sales
Aging the accounts receivable
Percentage of total accounts receivable
There are three ways to estimate uncollectible accounts expense:
When using the Allowance Method
15-10
Third method of estimating your expected uncollectible accounts is by Aging the
Accounts Receivable
Classify accounts receivable according to how long they have been outstanding
The longer an account is past due, the less likely it is to be collected
Aging the Accounts Receivable
15-12
Over 60 days past due 0.60 X 2,400.00 $ 1,440.00
Total estimated loss from doubtful accounts $ 2,370.00
Aging the Accounts Receivable
31–60 days past due 0.20 X 1,600.00 320.00
1–30 days past due 0.06 X 7,000.00 420.00
Current 0.005 X 38,000.00 190.00
15-13
Allowance for Doubtful Accounts is adjusted so that its ending balance is a $2,370 credit balance.Assume the beginning balance in the Allowance account is $108 credit.
QUESTION:
What is the amount of the adjustment?
ANSWER:
Total estimated expense + or – beginning balance
$2,370 Credit
- 108 Credit
$2,262.00 Credit
15-14
Income Statement
Balance Sheet
No effect on net income
Assets
Contra assets
No effect on net equity
Writing Off a Specific Account
15-15
1. Reinstate the account receivable.
2. Record the collection of cash.
Occasionally an account that was written off is later collected
Two entries are necessary:
Record the collection of accounts previously written off under the allowance method
Objective 3
15-16
Accounts Receivable and Uncollectible Accounts
Accounts Receivable and Uncollectible Accounts
Section 2: Applying the Direct Charge-off Method and Internal Control of Accounts Receivable.
Chapter
15
Section Objectives
4. Record losses from uncollectible accounts using the direct charge-off method.
5. Record the collection of accounts previously written off using the direct charge-off method.
6. Recognize common internal controls for accounts receivable.
15-17
Direct Charge-Off Method
Does not match revenue and expenses (Matching Principle).
Can overstate accounts receivable on the balance sheet.
The only method allowed for income tax purposes.
15-18
• Any company that extends credit is likely to have some type of uncollectible receivable.
• As with accounts receivable, notes receivable and other receivables can prove uncollectible.
• Losses from uncollectible notes receivable and other receivables can be handled by the direct charge-off method or the allowance method.
Accounting for Other Receivables and Bad Debt Losses
15-19
Authorization of all credit sales.
Procedures to properly record sales.
Separation of duties.
Invoices and monthly statements.
Internal Control of Accounts Receivable
Objective 6Recognize common internal controls for accounts receivable