0 Glencoe Accounting Unit 5 Chapter 24 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Unit 5 Accounting for Special Procedures Chapter.

Glencoe Accounting Unit 5 Chapter 24 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. 1

Unit 5Accounting for Special Procedures

Chapter 22 Cash Funds

Chapter 23 Plant Assets and Depreciation

Chapter 24 Uncollectible Accounts Receivable

Chapter 25 Inventories

Chapter 26 Notes Payable and Receivable


Chapter 24Uncollectible Accounts Receivable

What You’ll Learn Explain methods used to write off uncollectible

accounts. Determine uncollectible accounts receivable. Use the direct write-off method for uncollectible

accounts. Calculate bad debts expense. Make an adjusting entry for uncollectible accounts. Use the allowance method to record uncollectible

accounts. Record the collection of an account previously

written off.


Chapter 24Uncollectible Accounts Receivable

What You’ll Learn Describe two methods to estimate uncollectible

accounts expense. Define the accounting terms introduced in this

chapter.


Chapter 24, Section 1 The Direct Write-Off Method

What Do You Think?Why do businesses extend credit if they recognize that doing so is risky?


Main IdeaA business using the direct write-off method converts an account receivable to an expense when it becomes clear the customer will not pay the bill.

You Will Learn how and why businesses extend credit. how to write off an uncollectible account using the

direct method.

The Direct Write-Off MethodSECTION 24.1


Key Terms uncollectible account direct write-off method



Extending CreditBusinesses extend credit because they expect to sell more than if they accepted cash only.

An uncollectible account or bad debt is an account receivable that the business cannot collect. Businesses account for bad debts by using

the direct write-off method, or the allowance method.



The Direct Write-Off MethodThe direct write-off method is primarily used by businesses with few credit customers. When it is determined that a customer is not going to pay, the uncollectible account is removed from the records.



Writing Off an Uncollectible AccountHere is an example of writing off an uncollectible account.












Collecting a Written-Off AccountWhen a written-off account is paid, follow these steps:

Reinstate the customer’s account. Record the cash receipt.









Key Terms Review uncollectible account

An account receivable that the business cannot collect; also called a bad debt.

direct write-off method

A procedure for uncollectible accounts receivable; the business removes the uncollectible account from its accounting records when it determines the amount is not going to be paid.



Chapter 24, Section 2Uncollectible Accounts Receivable

What Do You Think?Why might the allowance method be preferable to the direct write-off method?


Main IdeaA business using the allowance method estimates the bad debt expense and writes off that amount.

You Will Learn why businesses apply the matching principle to

accounts receivable. how businesses use the matching principle to

recognize bad debt expense.

The Allowance MethodSECTION 24.2


Key Terms allowance method book value of accounts receivable



Matching Uncollectible Accounts Expense with RevenueBusinesses that have many charge customers use the allowance method for uncollectible accounts. Under the matching principle, the uncollectible accounts expense should be reported in the same year the sale takes place. To conform to this principle, credit sales are recorded in one year and an estimate of uncollectible accounts expense is recorded in the same year.



The Allowance MethodThe allowance method matches the estimated uncollectible accounts expense with sales made during the same period. The estimated uncollectible accounts expense is recorded as an adjustment, which affects two accounts:

Uncollectible Accounts Expense Allowance for Uncollectible Accounts











The Allowance MethodThe book value of accounts receivable is the difference between Accounts Receivable and Allowance for Uncollectible Accounts. It is the amount the business can expect to collect from its accounts receivable.



Reporting Estimated Uncollectible Amounts on the Financial StatementsView the placement on the Uncollectible Accounts Expense account on the income statement.



Reporting Estimated Uncollectible Amounts on the Financial StatementsShown is an example of the Allowance for Uncollectible Accounts account on the Balance Sheet.



Journalizing the Adjusting Entry for Uncollectible AccountsThe adjusting entries must now be journalized. At the end of the period, Uncollectible Accounts Expense is closed to Income Summary. The balance of Allowance for Uncollectible Accounts is not affected by closing entries.



Journalizing the Adjusting Entry for Uncollectible Accounts



Writing Off Uncollectible Accounts ReceivableThe Allowance for Uncollectible Accounts balance is saved until a business dips into it to write off an uncollectible account. The write-off of an account does not affect an expense account because the expense was recorded as an adjustment.




Writing Off Uncollectible Accounts Receivable











Collecting an Account Written Off by the Allowance MethodTo post a payment on a written-off account:

reinstate the account as shown on the following slides.

record the cash receipt by debiting Cash in Bank and crediting Accounts Receivable (controlling and subsidiary).



Collecting an Account Written Off by the Allowance Method












Key Terms Review allowance method

A procedure for uncollectible accounts receivable; the business matches the estimated uncollectible account expense with the sales made during the same period.

book value of accounts receivable

The amount the business can reasonable expect to collect from its accounts receivable.



Chapter 24, Section 3Estimating Uncollectible

Accounts Receivable

What Do You Think?If you were estimating uncollectible accounts expense for a business, what past information might be useful?


Main IdeaDifferent methods can be used to estimate the allowance for uncollectible accounts. Two methods are percentage of net sales and aging of accounts receivable.

You Will Learn how to use the percentage of net sales method. how to use the aging of accounts receivable

method.

Estimating Uncollectible Accounts Receivable

SECTION 24.3


Key Terms percentage of net sales method aging of accounts receivable method


SECTION 24.3


Percentage of Net Sales MethodThe percentage of net sales method assumes that a certain percentage of each year’s sales will be uncollectible. To find the adjustment for uncollectible accounts expense:

Determine the percentage. Calculate net sales. Multiply net sales by the percentage. Enter the amount calculated above on the work

sheet.


SECTION 24.3


Aging of Accounts Receivable MethodThe aging of accounts receivable method classifies the accounts receivable according to the number of days each account is past due.

This method assumes that the longer an account is overdue, the less likely it is to be collected.


SECTION 24.3


Aging of Accounts Receivable MethodUse these steps to find the adjustment for uncollectible accounts:

Classify and group each account according to the number of days it is past due.

Use past experience to determine the percentage of each group that will be uncollectible.

Multiply the uncollectible amount for each group by the percentage for that group.

Add the results for all groups. Enter the estimated uncollectible amount

adjusted by any balance in Allowance for Uncollectible Accounts.


SECTION 24.3


Aging of Accounts Receivable Method


SECTION 24.3


Aging of Accounts Receivable Method


SECTION 24.3


Key Terms Review percentage of net sales method

A method of estimating uncollectible accounts expense in which a business assumes that a certain percentage of each year’s net sales will be uncollectible.

aging of accounts receivable method

A method of estimating the uncollectible accounts expense in which each customer’s account is classified by age; the age classifications are multiplied by certain percentages; and the total estimated uncollectible amounts are added to determine the end-of-period balance of Allowance for Uncollectible Accounts.


SECTION 24.3


Question 1Calculate the allowance for uncollectible accounts using the aging of accounts receivable method and the following information:

Chapter 24 ReviewCHAPTER 24


Answer 1The allowance for uncollectible accounts is shown below:



Question 2What assumptions are made in using the percentage of sales method and the aging of accounts receivable method in estimating the allowance for uncollectible accounts?



Answer 2Both methods attempt to predict as closely as possible the amount of uncollectible accounts a business will have in a year. The percentage of sales method assumes that a certain percentage of each year’s net sales will be uncollectible. The aging of accounts receivable method assumes that the longer an account is overdue, the less likely it is to be collected.



Resources

Glencoe Accounting Online Learning Center

English Glossary

Spanish Glossary

0 Glencoe Accounting Unit 5 Chapter 24 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Unit 5 Accounting for Special Procedures Chapter.

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