accounting for uncollectible accounts receivable chapter 20

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Accounting for Accounting for Uncollectible Uncollectible Accounts Receivable Accounts Receivable Chapter 20 Chapter 20

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Page 1: Accounting for Uncollectible Accounts Receivable Chapter 20

Accounting for Uncollectible Accounting for Uncollectible Accounts ReceivableAccounts Receivable

Chapter 20Chapter 20

Page 2: Accounting for Uncollectible Accounts Receivable Chapter 20

Uncollectible AccountUncollectible Account

What is it?What is it? An account that has defaulted (not An account that has defaulted (not

paid) on what is owed to you…paid) on what is owed to you… What do you do?What do you do?

1.1. Either keep it on your books and hope that Either keep it on your books and hope that it is paid it is paid

2.2. Close the account outClose the account out1.1. Usually then we turn it over to a collection Usually then we turn it over to a collection

agencyagency

Page 3: Accounting for Uncollectible Accounts Receivable Chapter 20

Terms that you need to know.Terms that you need to know.

Accounts ReceivableAccounts Receivable That account that we have used all year That account that we have used all year

long when someone buys something long when someone buys something from us on account.from us on account.

Allowance for Uncollectible AccountsAllowance for Uncollectible Accounts Contra account for Accounts ReceivableContra account for Accounts Receivable The balance in this account reduces the The balance in this account reduces the

amount of accounts receivableamount of accounts receivable We agree that there will be a certain amount We agree that there will be a certain amount

of accounts that will not be paid. of accounts that will not be paid.

Page 4: Accounting for Uncollectible Accounts Receivable Chapter 20

Allowance method of recording Allowance method of recording losses from uncollectible accountslosses from uncollectible accounts When we use the allowance for When we use the allowance for

uncollectible accounts accountuncollectible accounts account Book ValueBook Value

The difference between an asset’s The difference between an asset’s account balance and its related contra account balance and its related contra account balance is its book value.account balance is its book value.

Car exampleCar example

More terms that you need to know.More terms that you need to know.

Page 5: Accounting for Uncollectible Accounts Receivable Chapter 20

Book value of accounts receivableBook value of accounts receivable The difference between accounts receivable The difference between accounts receivable

and its contra accountand its contra account Estimating uncollectible accounts expenseEstimating uncollectible accounts expense

Doesn't it make sense that we assume a Doesn't it make sense that we assume a portion of our accounts receivable will be portion of our accounts receivable will be uncollected?uncollected?

So we estimate a number, that a portion of our So we estimate a number, that a portion of our sales on account will be uncollectible. We get sales on account will be uncollectible. We get that percentage either from prior years or what that percentage either from prior years or what the industry average is…..the industry average is…..

Page 6: Accounting for Uncollectible Accounts Receivable Chapter 20

Total Sales on Account X Percentage = Estimated Uncollectible Total Sales on Account X Percentage = Estimated Uncollectible Accounts Accounts ExpenseExpense

982800982800 xx 1%1% 9828.009828.00

We assume that 9828.00 additional will not be collected. We would We assume that 9828.00 additional will not be collected. We would add that to the actual amount that has not been collected and that add that to the actual amount that has not been collected and that would give us our total of uncollectible. would give us our total of uncollectible.

The 9828 is an adjustment that goes on the worksheet adjustment The 9828 is an adjustment that goes on the worksheet adjustment column, and is journalized and posted just like the other column, and is journalized and posted just like the other adjustments. adjustments.

Page 7: Accounting for Uncollectible Accounts Receivable Chapter 20

Please work on On Your Own on page Please work on On Your Own on page 532532

Page 8: Accounting for Uncollectible Accounts Receivable Chapter 20

Writing off and collecting accounts Writing off and collecting accounts receivable. receivable.

Once we determine that an account will not be Once we determine that an account will not be collected. We need to write that account off.collected. We need to write that account off.

Here is how you need to think of it. When we Here is how you need to think of it. When we first put the sale on our books we increased first put the sale on our books we increased our Accounts Receivable, and increased our our Accounts Receivable, and increased our sales. sales.

Now that it is uncollectible we need to Now that it is uncollectible we need to decrease our Accounts receivable by writing it decrease our Accounts receivable by writing it off, and using the contra account Allowance off, and using the contra account Allowance for Uncollectible accounts to decrease our for Uncollectible accounts to decrease our sales account. This is called writing off the sales account. This is called writing off the account.account.

Page 9: Accounting for Uncollectible Accounts Receivable Chapter 20

General Journal Page 1

Date Account Title Doc No Post Ref Debit Credit

Dec 3 Allow. For Uncollectible Accounts M2   462  

Accts. Rec./ Ryan Recreation     462

         

     

December 3 Wrote off Ryan Recreation’s past due account as uncollectible, $462.00 Memorandum No. 2

Remember that we must post these in the appropriate General ledger accounts As well….Please look at page 534 in textbook

Page 10: Accounting for Uncollectible Accounts Receivable Chapter 20

What happens if we receive money What happens if we receive money from an account that was from an account that was

previously written off?previously written off?January 29. Received cash in full payment of Ryan Recreation’s account, previously written off as uncollectible. $462.00. Memorandum No. 3 and Receipt No. 8.

Cash Receipts Journal

Date Account Title DocPostRef

GeneralA/R

CreditSales Credit

Sales Tax Payable

SalesDiscou

ntDebit

CashDebitDebit Credit Debit Credit

Jan2

9RyanRecreational R8       462         462

                         

                         

Step one: Record the cash that we received from the payment of the Accounts Rec.

Page 11: Accounting for Uncollectible Accounts Receivable Chapter 20

Step two: is to fix the Account Receivable and put it back on the books as a receivable instead of a uncollectible.

So we have to write it out of the uncollectible accounts account, and put it back onto the accounts receivable.

General Journal

Date Account Title Doc No Post Ref Debit Credit

Jan 29 Accts/ Receivable/ Ryan Recreation M3   462  

    Allowance for Uncollectible Accts       462

                          

Page 12: Accounting for Uncollectible Accounts Receivable Chapter 20

Here is the work!!!!!!Here is the work!!!!!!

Problems 20-1,2,3Problems 20-1,2,3 Computer Problem 20-4Computer Problem 20-4