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Accounting II Chapter 7. Accounting for Uncollectible Accounts. Chapter Objectives. Define the accounting terms related to uncollectible accounts Identify accounting concepts and practices related to uncollectible accounts

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Accounting II Chapter 7

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Accounting ii chapter 7 l.jpg

Accounting IIChapter 7

Accounting for Uncollectible Accounts


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Chapter Objectives

  • Define the accounting terms related to uncollectible accounts

  • Identify accounting concepts and practices related to uncollectible accounts

  • Calculate and record estimated uncollectible accounts expense using the direct write-off method and the allowance method

  • Calculate and analyze accounts receivable turnover rates


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Table of Contents

Notes

Direct Write Off

Method

Allowance Write

Off

Method

A/R Ratios

Problems

Due

Home


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Bad Debts

  • There are two main ways to write off uncollectible accounts.

  • Also known as Bad Debts

  • People owe you money and they are not going to pay (you are pretty sure)

  • When you realize that you are not going to receive that Accounts Receivable you must write off the account


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Steps to create better A/R turnover Ratio

  • Send Statements to customers more often

  • Not sell on account to customer that has an account for which payment already more than 30 days overdue

  • Encourage more cash sales

  • Conduct a more rigorous credit check on new customers.


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Direct Write Off Method

  • The Direct Write off Method

    • Used only when an amount is actually known to be uncollectible.

    • Useful in small businesses when there are not many accounts receivables

    • Accounts affected: Accounts Receivable and Uncollectible Accounts Expense


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Direct Write Off Method

Uncollectible Accounts Expense

Accounts Receivable

Increase the Expense

Reduce/Decrease Asset

Accounts Receivable Subsidiary Ledger


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Direct Write Off Method

You are going to post this

twice. Once to Accounts

Rec. Once to James’

Account

November 15 Wrote off James Nordquist’s past due account as uncollectible, $50.00 Memorandum No. 21

Do You know the Answer

Nov 15 Uncollectible Accounts Expense M12 50.00

Accounts Receivable/James Nordquist’s 50.00


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Direct Write Off Method Writing An account back on

Accounts Receivable

Collection of Uncollectible Accounts

Decrease the Asset

Then You Record the

Cash Receipt (In RED)

Increase the Revenue

Increase the Asset

Cash

Accounts Receivable Subsidiary Ledger

Decrease the Asset

Increase the Asset

Increase Customers A/R Account


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You are going to post this

twice. Once to Accounts

Rec. Once to James’

Account

Collecting A Written off Account using Direct Method

January 21 Received cash in full payment of James Nordquist’s account, previously written off as uncollectible, $50.00 Memorandum No. 54 and Receipt No. 49

Do You know the Answer

Jan 21 Accounts Receivable/James Nordquist M54 50.00

Collection of Uncollectible Accounts 50.00

Writing the account back on

James Nordquist R49 50.00 50.00

Recording the Receipt


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Allowance Method of Recording Uncollectible Accounts Expense

  • Uses the Matching Expenses with Revenues principal

  • At the time of sales a business will make an estimate of how much money will not be collected.

  • Use a Contra Account titled Allowance for Uncollectible Accounts

  • The above account is an Asset Account


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Allowance Method of Recording Uncollectible Accounts Expense

  • Estimates based on past history

  • Two methods are

    • Percentage of Sales Method (assumes % of each sale will become uncollectible)

    • Percentage of Accounts Receivable Method (assumes % of A/R at the end of each period will become uncollectible)


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Allowance Method Write Off at Year End

Allowance for Uncollectible Accounts

Uncollectible Accounts Expense

Increase the Contra Asset

Increase the Expense

You will only use this account once per

Year. During the year when you write off

Individual accounts they will go to reduce


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Allowance Method Year End Entry

Using the Sales Method Calculate the Uncollectible Expenses for the Year with Net Sales $113,285.75. Percentage Estimated to be .5%. Record the expense. (This would be a year End Adjustment on the Worksheet)

Do You know the Answer

Dec 31 Uncollectible Accounts Expense 566.43

Allowance for Uncollectible Accounts 566.43


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Writing off an Uncollectible Account the Allowance Method

You are going to post this

twice. Once to Accounts

Rec. Once to Candances’

Account

January 5. Wrote off Candance Rhode’s past due account as uncollectible, $42.80. Memorandum No. 71

Do You know the Answer

Jan 5 Allowance for Uncollectible Accts M71 42.80

Accounts Rec./Candance Rhode 42.80


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Write off individual Accounts throughout the year using Allowance Method

Allowance for Uncollectible Accounts

Accounts Receivable

Decrease the Contra Asset

Decrease the Asset

Accounts Receivable Subsidiary Ledger

Decrease Individual Customer Account in A/R subsidiary Ledger


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You are going to post

this twice. Once to

AccountsRec. Once to

Candance’s

Account

Collecting A Written off Account using Allowance Method

April 5. Received cash in full payment of Candance Rhode’s account, previously written off as uncollectible, $42.50. Memorandum No. 92 and Receipt No. 280

Do You know the Answer

Apr 5 Accounts Receivable/Candance Rhode M92 42.80

Allowance for Uncollectible Accounts 42.80

Writing the account back on

Candance Rhode R280 42.80 42.80

Recording the Receipt


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Calculate Adjustments using Aging of Account Receivable

$8.734.08

X .1%

The Older the Accounts

Receivable The less

Likely you will ever see

the Money

At the End of the

Year this is the

Amount that

Should be in the

Allowance for

Uncollectible

Accounts

Total of

the Row


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Accounts Receivable Turnover Ratio

  • Used to compare the ratios against prior years and others in the same industry.

  • Accounts Receivable Turnover - the number of times the average about of accounts receivable is collected during a specified period. (Higher Better)

  • Average Number of Days for Payment - (Lower is better)


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Accounts Receivable Turnover Formula

1st Step: Find Average Book Value of Accounts Receivables:

(Beginning A/R - Beginning Allowances for Uncollectible) + (End A/R - Ending Allowances for Uncollectible) = Total Book Values

Total Book Values divided by 2 = Avg. Book Value of A/R

2nd Step: Find A/R turnover Ratio

Net Sales / Avg. Book Value of A/R = A/R turnover Ratio

3rd Step: Find Average Number of Days for Payment

Days in the Year divided by A/R turnover Ratio = Avg. No. Days for Payment


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Problems to Complete

  • All Definitions and Audit Your understanding Questions

  • Work Together/On Your Own 7-1

  • Work Together/On Your Own 7-2

  • Work Together/On Your Own 7-3

  • Application Problems

    • 7-1, 7-2, 7-3, 7-4, 7-5, 7-6, 7-7

    • Questions on Study Guide

  • Exam Chapter 7


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