GLENCOE / McGraw-Hill

1. GLENCOE / McGraw-Hill

2. Accounts Receivable and Uncollectible Accounts

3. Determining Losses From Uncollectible Accounts Section Objective 1. Record the losses from uncollectible accountsreceivable using the direct charge-off and allowance methods.

4. Page 556 Losses from uncollectible accounts are a normal cost of doing business.

5. Page 556 Methods used for writing off accounts that are determined to be uncollectible: • Direct Charge-Off Method • Allowance Method

6. QUESTION: What is the direct charge-off method? ANSWER: The direct charge-off method is the method of recording uncollectible accounts losses as they occur. Page 556

7. Page 556 Direct Charge-Off Method • Does not match revenue and expenses • Can overstate accounts receivable • The only method allowed for income tax purposes

8. QUESTION: What is the allowance method? ANSWER: The allowance method is the method of charging uncollectible accounts expense in the period when the sales are recorded. Page 557

9. Page 557 Allowance Method • Estimates losses from uncollectible accounts • Matches uncollectible accounts expense to sales • Uses a valuation account (Allowance for Doubtful Accounts)

10. QUESTION: What is a valuation account? ANSWER: A valuation account is an account whose balance is revalued or reappraised in light of reasonable expectations. Page 557

11. Page 557 Allowance Method Three ways to estimate uncollectible accounts expense: • Percentage of net credit sales • Aging the accounts receivable • Percentage of total accounts receivable

12. Page 557 Percentage of Net Credit Sales • Multiply net credit sales by a percentage. • Percentage is based on the company’s previous experience. • New businesses base the percentage on the experience of businesses in the same industry.

13. 20-- Dec. 31 Uncollectible Accounts Expense 800.00 Allowance for Doubtful Accounts 800.00 To record estimated uncollectible accounts based on 0.4 percent of net credit sales of $200,000 Page 558 Percentage of Net Credit Sales Sales Amount $200,000.00 Percent estimated to be uncollectible x 0.4% Total amount to write off $ 800.00

14. Page 558 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.

15. TRILLI‘S OFFICE SUPPLY Schedule of Accounts Receivable by Age December 31, 2004 Past Due - Days Customer Balance Current 1 - 30 31 - 60 Over 60 Aliguar, Piralto 100.00 100.00 Aston, Thomas 120.00 100.00 20.00 Beard, Hal 80.00 80.00 Zellner, Martin 98.00 60.00 38.00 Totals 18,400.00 16,000.00 1,400.00 600.00 400.00 Page 558 Aging the Accounts Receivable

16. Page 558 Aging the Accounts Receivable Over 60 days past due 0.40 X 400.00 $160.00 31–60 days past due 0.10 X 600.00 60.00 1–30 days past due 0.05 X 1,400.00 70.00 Current 0.03 X 16,000.00 480.00 Total estimated loss from doubtful accounts $ 770.00

17. QUESTION: • $770 Credit • 88 Credit What is the amount of the adjustment? $682 Credit ANSWER: Page 559 Allowance for Doubtful Accounts is adjusted so that its ending balance is a $770 credit. The beginning balance is $88 credit. Total estimated expense + or – beginning balance

18. Page 559 Percentage of Total Accounts Receivable • Multiply the total amount of accounts receivable by a single percentage.

19. Page 559 Percentage of Total Accounts Receivable Accounts Uncollectible Date Receivable Accounts 12/31/01 $12,200.00 $ 620.00 12/31/02 13,800.00 660.00 12/31/03 15,900.00 814.00 Total $41,900.00 $2,094.00 Average $13,967.00 $ 698.00 Average accounts written off Average accounts receivable 698 13,967 0.05 5% 12/31/04 Accounts Receivable Balance = $18,400 Est. Uncollectible Accounts = $18,400 X 0.05 = $920

20. QUESTION: • $920 Credit • 88 Credit What is the amount of the adjustment? $832 Credit ANSWER: Page 559 Allowance for Doubtful Accounts is adjusted so that its ending balance is a $920 credit. The beginning balance is $88 credit. Total estimated expense + or – beginning balance

21. Page 560 Comparing the Methods Percentage of Net Credit Sales • Focus is on the income statement. • The beginning balance of Allowance for Doubtful Accounts is not considered.

22. Page 560 Comparing the Methods Aging of Accounts Receivable and Percentage of Total Accounts Receivable • Focus is on the balance sheet. • The beginning balance of Allowance for Doubtful Accounts is considered.

23. R E V I E W Complete the following sentences: direct charge-off The ______________ method is the only method allowed for income tax purposes. allowance The _________ method estimates losses from uncollectible accounts. three There are _____ ways to estimate losses from uncollectible accounts.

24. R E V I E W Complete the following sentences: The estimate method that does not consider the beginning Allowance for Doubtful Accounts balance is the ________________ __________ method. percentage of net credit sales The estimate method that considers how long accounts are past due is the _____ _____________________ method. aging the accounts receivable The estimate method that considers recent years’ account receivable and uncollectible accounts expense is the _____________ _____________________________. percentage of total accounts receivable method

25. Thank You for using College Accounting, Tenth Edition Price • Haddock • Brock