Chapter 20 Notes Uncollectible Accounts Expense Uncollectible Account- An account that has been defaulted on. Meaning that the person did not pay when it was due. Explanation of the Accounts Uncollectible Accounts Expense - It is the same as an expense account. Increase on the Debit side Decrease on the Credit Side Allowance for Uncollectible Accounts Decrease on the Debit Side - Increase on the Credit side Allowance method of recording losses from uncollectible accounts - Businesses understand that portions of their accounts receivable will not be paid off. Understanding that this happens, they allow/ understand that a certain percentage of this will not be paid. Book Value of Account Receivable = Total Accounts receivable (Allowance for uncollectible Accounts). Estimating Uncollectible Accounts Expense. We determine or estimate the total sales on account and then allow a certain percentage of that to be uncollectible. (usually from past experience) Total Sale on Account X Percentage = Estimated Uncollectible Accounts Expense $982,800 1% $9,828 Once we figure out the adjustment we need to apply it to our worksheet and then Journalize it and post it to our journals. Worksheet Trial Balance Adjustments Allowance for uncollectible Accounts 320 (b)9828 Uncollectible Accounts Expense (b)9828
General Journal Ref. Adjusting Entries Dec 31 Uncollectible Accounts Expense 6165 9828 Allow, for Uncollectible Accts. 1130 9828 Of course we must post these entries as well to those accounts in the General Ledger Account Sales Allowance for Uncollectible Accounts 1130 Account Ref Balance Dec 27 g14 420 320 Account Uncollectible Accounts Expense Account 6165 Ref Balance Dec 31 g15 9828 9828 Now that we have discussed how an account is uncollectible lets describe the situation that happens. Someone comes into our store and buys something from us. At the end of the month we send them a bill that says they owe us the amount of the purchase. We receive no money. We send them another bill and another bill until finally we give up on them. Though this doesn t usually happen in the real world we decide to just write off the account. Simply put we just take them from our books and put them into an uncollectible account as someone who we assume we will never get the money from. When we do this we decrease the accounts receivable and the corresponding account in the accounts receivable ledger.
Looks something like this: General Journal Ref. Nov 3 Allowance for Uncollectible Accounts M2 1130 462 Accts Rec/ Ryan Recreation 1125/180 462 Then of course we must post Account Accounts Receivable Account 1125 Ref Balance Dec 31 CR49 62716 72458 Jan 3 G18 462 71996 Account Allowance for Uncollectible Accounts Account 1130 Ref Balance Dec 31 G15 62716 320 Jan 3 G18 462 9686 Customer Ryan Recreation Customer 180 Ref Balance Apr 6 S12 462 462 3-Jan Written Off G18 462 -------- --------- Now this person is totally off our books What happens if they pay us off down the road? Here are the steps and then I will show you using the journals 1. We must reopen the account that we closed on the books 2. Then we must show that we received the cash in the cash receipts journal.
So first we must reopen the account. It would look just the opposite of when we wrote the account off. We must increase the Accounts receivable and the corresponding account, and decrease the allowance for uncollectible accounts. Looks like this: General Journal Ref. Nov 29 Accts Rec/ Ryan Recreation M3 462 Allowance for Uncollectible Accounts 462 Then we must recognize the Cash received in the Cash Receipts Journal. Cash Receipts Journal General Accounts Sales Tax Payable Sales Doc Ref Receivable Credit Sales Credit Discount Debit Cash Debit 29 Ryan Recreation R8 462 462 Then we must post all of this to bring everything up to date. Account Accounts Receivable Account 1125 Ref Balance Dec 31 CR49 62716 72458 Jan 3 G18 462 71996 Jan 29 G18 462 72458 Account Allowance for Uncollectible Accounts Account 1130 Ref Balance Dec 31 G15 62716 320 Jan 3 G18 462 9686 Jan 29 G18 462 10148 Customer Ryan Recreation Customer 180 Ref Balance Apr 6 S12 462 462 3-Jan Written Off G18 462 -------- --------- Jan 29 Reopen Acct G18 462 462 29 CR51 462 --------- --------
So in review: 1. Someone buys something from us at our store. 2. Later that month we send them a bill, but we receive no money. 3. We eventually write them off our books as someone who will not pay- or uncollectible 4. Then the person eventually pays us back. Chapter problems 1-4