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Chapter 24. $. Uncollectible Accounts Receivable. 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. $. $. $.

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Uncollectible Accounts Receivable

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Uncollectible accounts receivable

Chapter 24

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Uncollectible Accounts Receivable

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.

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What effect do these uncollectible accounts have on the business?


Uncollectible accounts receivable

Chapter 24

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Section 1The 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.

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Uncollectible accounts receivable

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

Chapter 24

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Why It’s Important

Sometimes charge customers fail to pay the amounts they owe. Unpaid accounts are eventually removed from the accounting records.

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  • Key Terms

  • uncollectible accounts

  • direct write-off method

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Uncollectible accounts receivable

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

Chapter 24

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The 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.

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Uncollectible accounts receivable

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

Chapter 24

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Writing Off an Uncollectible Account

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Business Transaction

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

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ANALYSISIdentify1.The accounts affected are Uncollectible Accounts Expense, Accounts Receivable (controlling), and Accounts Receivable—Robert Galvin (subsidiary).

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Uncollectible accounts receivable

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

Chapter 24

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Writing Off an Uncollectible Account (cont'd.)

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Business Transaction (cont'd.)

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

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ANALYSISClassify2.Uncollectible Accounts Expense is an expense account. Accounts Receivable (controlling) and Accounts Receivable—Robert Galvin (subsidiary) are asset accounts.

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Uncollectible accounts receivable

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

Chapter 24

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Writing Off an Uncollectible Account (cont'd.)

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Business Transaction (cont'd.)

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

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

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Uncollectible accounts receivable

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

Chapter 24

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Writing Off an Uncollectible Account (cont'd.)

Business Transaction (cont'd.)

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

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DEBIT-CREDIT RULE4.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.

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Uncollectible accounts receivable

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

Chapter 24

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Writing Off an Uncollectible Account (cont'd.)

Business Transaction (cont'd.)

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

UncollectibleAccounts

Accounts ExpenseReceivable

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T ACCOUNTS6.

Credit

Credit

265

Debit

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265

Debit

+

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Accounts Receivable Subsidiary Ledger

Robert Galvin

Credit

265

Debit

+


Uncollectible accounts receivable

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

Chapter 24

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Writing Off an Uncollectible Account (cont'd.)

Business Transaction (cont'd.)

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

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JOURNAL ENTRY7.

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Uncollectible accounts receivable

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

Chapter 24

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Collecting a Written-Off Account

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  • First, the customer’s account is reinstated, or reentered in the accounting records.

  • Second, the cash receipt is recorded.

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Uncollectible accounts receivable

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

Chapter 24

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Check Your Understanding

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Explain the use of the direct write-off method of accounting for uncollectible accounts.

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