Uncollectible Accounts ReceivableUncollectible Accounts ReceivableMaking Accounting Relevant

Businesses grant customers the right to

use credit instead of cash to purchase

items. Sometimes customers fail to pay

their debts to the business. These debts

are called uncollectible accounts.

Making Accounting Relevant

Businesses grant customers the right to

use credit instead of cash to purchase

items. Sometimes customers fail to pay

their debts to the business. These debts

are called uncollectible accounts.

What effect do these uncollectible

accounts have on the business?

What effect do these uncollectible

accounts have on the business?

Section 1 The Direct Write-Off Method

Section 1 The Direct Write-Off Method

What You’ll Learn

Why businesses extend credit.

The direct write-off method of accounting for uncollectible accounts.

How to record the direct write-off on an uncollectible accounts receivable.

How to record the collection of an account that was previously written-off under the direct write-off method.

What You’ll Learn

Why businesses extend credit.

The direct write-off method of accounting for uncollectible accounts.

How to record the direct write-off on an uncollectible accounts receivable.

How to record the collection of an account that was previously written-off under the direct write-off method.

Why It’s Important

Sometimes charge customers fail to

pay the amounts they owe. Unpaid

accounts are eventually removed from

the accounting records.

Why It’s Important

Sometimes charge customers fail to

pay the amounts they owe. Unpaid

accounts are eventually removed from

the accounting records.

Key Terms

uncollectible accounts

direct write-off method

Key Terms

uncollectible accounts

direct write-off method

Section 1 The Direct Write-Off Method (cont'd.)Section 1 The Direct Write-Off Method (cont'd.)

The Direct Write-Off MethodThe Direct Write-Off Method An uncollectible account, or bad debt,

is created when a customer fails to pay the amount due on account.

Under the direct write-off method, when the business determines that the amount owed is not going to be paid, the uncollectible account is removed from the accounting records.

Uncollectible Accounts Expense is debited and Accounts Receivable (both controlling and subsidiary) is credited.

An uncollectible account, or bad debt, is created when a customer fails to pay the amount due on account.

Under the direct write-off method, when the business determines that the amount owed is not going to be paid, the uncollectible account is removed from the accounting records.

Uncollectible Accounts Expense is debited and Accounts Receivable (both controlling and subsidiary) is credited.

Section 1 The Direct Write-Off Method (cont'd.)Section 1 The Direct Write-Off Method (cont'd.)

Writing Off an Uncollectible AccountWriting Off an Uncollectible Account

Section 1 The Direct Write-Off Method (cont'd.)Section 1 The Direct Write-Off Method (cont'd.)

Business Transaction

On August 25, On Your Mark wrote off as uncollect-ible Robert Galvin’s account for $265, Memorandum 170.

ANALYSIS Identify 1. The accounts affected are Uncollectible Accounts Expense, Accounts Receivable (controlling), and Accounts Receivable—Robert Galvin (subsidiary).

Writing Off an Uncollectible Account (cont'd.)

Writing Off an Uncollectible Account (cont'd.)

Section 1 The Direct Write-Off Method (cont'd.)Section 1 The Direct Write-Off Method (cont'd.)

Business Transaction (cont'd.)

On August 25, On Your Mark wrote off as uncollec-tible Robert Galvin’s account for $265, Memorandum 170.

ANALYSIS Classify 2.Uncollectible Accounts Expense is an expense account. Accounts Receivable (controlling) and Accounts Receivable—Robert Galvin (subsidiary) are asset accounts.

Writing Off an Uncollectible Account (cont'd.)

Writing Off an Uncollectible Account (cont'd.)

Section 1 The Direct Write-Off Method (cont'd.)Section 1 The Direct Write-Off Method (cont'd.)

On August 25, On Your Mark wrote off as uncollec-tible Robert Galvin’s account for $265, Memorandum 170.

ANALYSIS + / – 3.Uncollectible Accounts Expense is increased by $265. Accounts Receivable (controlling) and Accounts Receivable—Robert Galvin (subsidiary) are decreased by $265.

Business Transaction (cont'd.)

Writing Off an Uncollectible Account (cont'd.)

Writing Off an Uncollectible Account (cont'd.)

Section 1 The Direct Write-Off Method (cont'd.)Section 1 The Direct Write-Off Method (cont'd.)

On August 25, On Your Mark wrote off as uncollec-tible Robert Galvin’s account for $265, Memorandum 170.

DEBIT-CREDIT RULE 4. Increases to expense accounts are recorded as debits. Debit Uncollectible Accounts Expense for $265.

5.Decreases to asset accounts are recorded as credits. Credit Accounts Receivable (controlling) and Accounts Receivable—Robert Galvin (subsidiary) for $265.

Business Transaction (cont'd.)

Writing Off an Uncollectible Account (cont'd.)

Writing Off an Uncollectible Account (cont'd.)

Section 1 The Direct Write-Off Method (cont'd.)Section 1 The Direct Write-Off Method (cont'd.)

On August 25, On Your Mark wrote off as uncollectible Robert Galvin’s account for $265, Memorandum 170.

Business Transaction (cont'd.)

T ACCOUNTS 6. Uncollectible Accounts

Accounts Expense Receivable

Debit

+

265

Credit

–

Debit

+

Credit

–

265

Accounts Receivable Subsidiary LedgerRobert Galvin

Debit

+

Credit

–

265

Writing Off an Uncollectible Account (cont'd.)

Writing Off an Uncollectible Account (cont'd.)

Section 1 The Direct Write-Off Method (cont'd.)Section 1 The Direct Write-Off Method (cont'd.)

On August 25, On Your Mark wrote off as uncollec-tible Robert Galvin’s account for $265, Memorandum 170.

Business Transaction (cont'd.)

JOURNAL ENTRY 7.

Collecting a Written-Off AccountCollecting a Written-Off Account

First, the customer’s account is

reinstated, or reentered in the

accounting records.

Second, the cash receipt is

recorded.

First, the customer’s account is

reinstated, or reentered in the

accounting records.

Second, the cash receipt is

recorded.

Section 1 The Direct Write-Off Method (cont'd.)Section 1 The Direct Write-Off Method (cont'd.)

Check Your UnderstandingCheck Your Understanding

Explain the use of the direct

write-off method of accounting

for uncollectible accounts.

Explain the use of the direct

write-off method of accounting

for uncollectible accounts.

Section 1 The Direct Write-Off Method (cont'd.)Section 1 The Direct Write-Off Method (cont'd.)