Transcript Chapter 24 ppt

A business using the direct write-off method to
write off uncollectible accounts converts an
account receivable to an expense when it
become clear the customer will not pay the bill.
A business using the allowance method
estimates the bad debt expense and writes
off that amount.
Glencoe Accounting
Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
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.
Describe two methods to estimate uncollectible accounts expense.
Glencoe Accounting
Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
Section 24.1
The Direct
Write-Off Method
Key Terms
uncollectible account
direct write-off method
Glencoe Accounting
Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
Extending Credit
Section 24.1
The Direct
Write-Off Method
Methods for Dealing with an Uncollectible Account
Direct Write-Off
Method
uncollectible account
An account receivable that
the business cannot
collect; also called a bad
debt.
Glencoe Accounting
Allowance
Method
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.
Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
The Direct Write-Off Method
Section 24.1
The Direct
Write-Off Method
Writing Off an Uncollectible Account
Business Transaction
On August 25, 2013 The Starting Line wrote off as uncollectible
Galvin’s account for $265, Memorandum 170.
See page 702
Glencoe Accounting
Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
The Direct Write-Off Method
Section 24.1
The Direct
Write-Off Method
Writing Off an Uncollectible Account
Business Transaction
On August 25, 2013 The Starting Line wrote off as uncollectible
Galvin’s account for $265, Memorandum 170.
See page 702
Glencoe Accounting
Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
The Direct Write-Off Method
Section 24.1
The Direct
Write-Off Method
When a Written-Off Account Is Paid:
Reinstate the customer’s account.
Record the cash receipt.
Glencoe Accounting
Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
The Direct Write-Off Method
Section 24.1
The Direct
Write-Off Method
Collecting a Written-Off Account
Business Transaction
On September 5 The Starting Line received $265 from Robert Galvin,
whose account was written off as uncollectible on August 25,
Memorandum 176 and Receipt 1109. First reinstate the account
receivable.
See pages 703–704
Glencoe Accounting
Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
The Direct Write-Off Method
Section 24.1
The Direct
Write-Off Method
Collecting a Written-Off Account
Business Transaction
On September 5 The Starting Line received $265 from Robert Galvin,
whose account was written off as uncollectible on August 25,
Memorandum 176 and Receipt 1109. First reinstate the account
receivable.
See pages 703–704
Glencoe Accounting
Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
Section 24.2
The Allowance Method
Key Terms
allowance method
book value of accounts receivable
Glencoe Accounting
Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
Matching Uncollectible Accounts
Expense with Revenue
Section 24.2
The Allowance Method
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.
Glencoe Accounting
Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
The Allowance Method
Section 24.2
The Allowance Method
What Is
the Allowance Method?
allowance method
A procedure for uncollectible accounts receivable; the business
matches the estimated uncollectible account expense with the
sales made during the same period.
Glencoe Accounting
Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
The Allowance Method
Section 24.2
The Allowance Method
The estimated
uncollectible
Uncollectible Accounts
Expense
accounts expense
is recorded as an
adjustment, which
affects two
accounts:
Glencoe Accounting
Allowance for
Uncollectible Accounts
Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
The Allowance Method
Section 24.2
The Allowance Method
Adjustment
On December 31 The Starting Line estimates its uncollectible accounts
expense for the year ended December 31 to be $1,350. (Various
methods are used to estimate uncollectible accounts expense.)
See page 708
Glencoe Accounting
Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
The Allowance Method
Section 24.2
The Allowance Method
Adjustment
On December 31 The Starting Line estimates its uncollectible accounts
expense for the year ended December 31 to be $1,350. (Various
methods are used to estimate uncollectible accounts expense.)
See page 708
Glencoe Accounting
Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
The Allowance Method
Section 24.2
The Allowance Method
The book value of accounts receivable is the difference between
Accounts Receivable and Allowance for Uncollectible Accounts.
book value of accounts receivable
The amount the business can reasonable expect to
collect from its accounts receivable.
Glencoe Accounting
Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
The Allowance Method
Section 24.2
The Allowance Method
See page 709
Uncollectible Accounts Expense
Glencoe Accounting
Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
The Allowance Method
Section 24.2
The Allowance Method
Allowance for Uncollectible Accounts on the Balance Sheet
See page 709
Glencoe Accounting
Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
The Allowance Method
Section 24.2
The Allowance Method
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.
Glencoe Accounting
Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
The Allowance Method
Section 24.2
The Allowance Method
Journalizing the
Adjusting Entry for
Uncollectible
Accounts
See page 710
Glencoe Accounting
Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
The Allowance Method
Section 24.2
The Allowance Method
The 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.
Glencoe Accounting
Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
The Allowance Method
Section 24.2
The Allowance Method
Business Transaction
On April 18 after many attempts to collect the amount owed, The
Starting Line decides to write off the account of Megan Sullivan for
$150, Memorandum 236.
See page 711
Glencoe Accounting
Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
The Allowance Method
Section 24.2
The Allowance Method
Business Transaction
On April 18 after many attempts to collect the amount owed, The
Starting Line decides to write off the account of Megan Sullivan for
$150, Memorandum 236.
See pages 711–712
Glencoe Accounting
Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
The Allowance Method
Section 24.2
The Allowance Method
To 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).
Glencoe Accounting
Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
The Allowance Method
Section 24.2
The Allowance Method
Business Transaction
On November 19 The Starting Line received a check for $150 from
Megan Sullivan, whose account was written off April 18, Memorandum
294 and Receipt 2243.
See pages 712–713
Glencoe Accounting
Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
The Allowance Method
Section 24.2
The Allowance Method
Business Transaction
On November 19 The Starting Line received a check for $150 from
Megan Sullivan, whose account was written off April 18, Memorandum
294 and Receipt 2243.
See pages 712–713
Glencoe Accounting
Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
Section 24.3
Estimating Uncollectible
Accounts Receivable
Key Terms
percentage of net sales method
aging of accounts receivable method
Glencoe Accounting
Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
Percentage of
Net Sales Method
Section 24.3
Estimating Uncollectible
Accounts Receivable
What Is
Percentage of Net Sales Method?
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.
Glencoe Accounting
Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
Percentage of
Net Sales Method
Section 24.3
Estimating Uncollectible
Accounts Receivable
Determine the percentage.
Finding the
adjustment for
uncollectible
accounts
expense
Calculate net sales.
Multiply net sales by the percentage.
Enter the amount calculated above on
the work sheet.
Glencoe Accounting
Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
Aging of Accounts
Receivable Method
Section 24.3
Estimating Uncollectible
Accounts Receivable
What Is
the Aging of Accounts Receivable Method?
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-ofperiod balance of Allowance for Uncollectible Accounts.
Glencoe Accounting
Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
Aging of Accounts
Receivable Method
Section 24.3
Estimating Uncollectible
Accounts Receivable
Steps for Finding the Adjustments for
Uncollectible Accounts Expense
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.
Glencoe Accounting
Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
Aging of Accounts
Receivable Method
Section 24.3
Estimating Uncollectible
Accounts Receivable
See page 717
Glencoe Accounting
Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
Aging of Accounts
Receivable Method
Section 24.3
Estimating Uncollectible
Accounts Receivable
See page 717
Glencoe Accounting
Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
Question 1
Calculate the allowance for uncollectible accounts using the aging of
accounts receivable method and the following information:
$ 56
30
65
80
200
$ 431
Glencoe Accounting
Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
Question 2
What assumptions are made in using the percentage of sales method and
the aging of accounts receivable method in estimating the allowance for
uncollectible accounts?
Both 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.
Glencoe Accounting
Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
End of