Key Terms - Accounting I



NOTES

Students must understand the concepts listed below to be able to apply the procedures to prepare journal entries related to uncollectible accounts.

▪ Uncollectible Accounts

← Uncollectible accounts are accounts receivable that cannot be collected.

← The adjustment for uncollectible accounts expense is recorded as an adjusting entry in the general journal.

▪ Writing Off an Uncollectible Account Using the Direct Write-Off Method

← The direct write-off method is used primarily by small businesses and those with few charge customers.

← When the business determines that the amount owed by an individual customer is not going to be paid, that uncollectible account is removed from the accounting records.

← The direct write-off method is the only method a business can use for income tax purposes.

▪ Estimating and Recording Uncollectible Accounts Expense Using the Allowance Method

← The allowance method of recording losses from uncollectible accounts attempts to record the expense of uncollectible accounts in the same fiscal year as the related sales are recorded.

← An estimate of the uncollectible accounts is recorded to the contra asset account Allowance for Uncollectible Accounts and the expense account Uncollectible Accounts Expense (Bad Debts Expense).

← Estimate uncollectible accounts expense by calculating a percentage of total sales on account.

← The allowance method of estimating uncollectible accounts expense (percentage of total sales on account) assumes that a portion of every dollar of sales on account will become uncollectible.

← At the end of a fiscal period, an adjustment for uncollectible accounts expense is planned on a worksheet. This adjustment is recorded on the worksheet as an adjusting entry.

▪ Collecting Uncollectible Accounts Receivable

← Occasionally, after an account is written off, the customer pays the delinquent account. Several accounts must be changed to recognize payment of a written-off account receivable.

← Two entries are recorded for the collection of a written-off account receivable.

UNPACKED CONTENT

I. Procedure for Journalizing Uncollectible Accounts Receivable Using the Direct Write-Off Method

A. Debit Uncollectible Accounts Expense.

B. Credit Accounts Receivable/Customer’s account.

II. Procedure for Estimating Uncollectible Accounts Expense and Journalizing the Adjusting Entry Using the Allowance Method

A. Total sales X Percentage of sales expected to be uncollectible = Uncollectible Accounts Expense

B. Adjustment for uncollectible accounts expense

1. Debit Uncollectible Accounts Expense.

2. Credit Allowance for Uncollectible Accounts.

III. Procedure for Journalizing the Collection of Uncollectible Accounts Receivable

A. Re-open an account receivable previously written off

1. Debit Accounts Receivable/Customer’s account.

2. Credit Allowance for Uncollectible Accounts.

B. Record cash received for an account previously written off

1. Debit Cash.

2. Credit Accounts Receivable/Customer’s account.

KEY TERMS

• Uncollectible account

• Writing off an account

• Allowance for Uncollectible Accounts

• Uncollectible Accounts Expense

• Direct write-off method

• Allowance method

• Book value of accounts receivable

• Percentage of net sales

• Aging of accounts

5.02 Journalizing Uncollectible Accounts Receivable

An or bad debt is an account receivable that the business cannot collect. Businesses account for bad debts by using

▪ the direct write-off method, or

▪ the allowance method.

The method of accounting for bad debts is primarily used by businesses with few credit customers. When it is determined that an individual customer is not going to pay, that uncollectible account is removed from the records.

Writing Off an Uncollectible Account with Direct Write-Off Method

Debit

Credit

Collecting a Written-Off Account with the Direct Write-Off Method

When a written-off account is paid, follow these steps:

▪

▪

To Reinstate the Customer’s Account

Debit

Credit

The allowance method of accounting for bad debts matches the estimated uncollectible accounts expense with sales made during the same period. The estimated uncollectible accounts expense is recorded as an adjustment, which affects two accounts:

▪

▪

5.02 Journalizing Uncollectible Accounts Receivable – Page 2

The is the difference between and

. It is the amount the business can expect to collect from its accounts receivable.

Writing Off an Uncollectible Account with Allowance Method

Debit

Credit

Collecting a Written-Off Account with the Allowance Method

When a written-off account is paid, follow these steps:

▪

▪

To Reinstate the Customer’s Account with the Allowance Method

Debit

Credit

___ is a method of estimating the amount of uncollectible accounts in which a business assumes that a certain percentage of each year’s sales will be uncollectible. To find the adjustment for Uncollectible Accounts Expense:

▪

▪

▪

5.02 Journalizing Uncollectible Accounts Receivable

An uncollectible account or bad debt is an account receivable that the business cannot collect. Businesses account for bad debts by using

▪ the direct write-off method, or

▪ the allowance method.

The direct write-off method of accounting for bad debts is primarily used by businesses with few credit customers. When it is determined that an individual customer is not going to pay, that uncollectible account is removed from the records.

Writing Off an Uncollectible Account with Direct Write-Off Method

Debit Uncollectible Accounts Expense

Credit Accounts Receivable/Customer’s account

Collecting a Written-Off Account with the Direct Write-Off Method

When a written-off account is paid, follow these steps:

▪ Reinstate the customer’s account.

▪ Record the cash receipt.

To Reinstate the Customer’s Account

Debit Accounts Receivable/Customer’s account

Credit Uncollectible Accounts Expense

The allowance method of accounting for bad debts matches the estimated uncollectible accounts expense with sales made during the same period. The estimated uncollectible accounts expense is recorded as an adjustment, which affects two accounts:

▪ Uncollectible Accounts Expense

▪ Allowance for Uncollectible Accounts

5.02 Journalizing Uncollectible Accounts Receivable – Page 2

The book value of accounts receivable is the difference between Accounts Receivable and Allowance for Uncollectible Accounts. It is the amount the business can expect to collect from its accounts receivable.

Writing Off an Uncollectible Account with Allowance Method

Debit Allowance for Uncollectible Accounts

Credit Accounts Receivable/Customer’s account

Collecting a Written-Off Account with the Allowance Method

When a written-off account is paid, follow these steps:

▪ Reinstate the customer’s account.

▪ Record the cash receipt.

To Reinstate the Customer’s Account with the Allowance Method

Debit Accounts Receivable/Customer’s account

Credit Allowance for Uncollectible Accounts

Percentage of net sales is a method of estimating the amount of uncollectible accounts in which a business assumes that a certain percentage of each year’s sales will be uncollectible. To find the adjustment for Uncollectible Accounts Expense:

▪ Determine the percentage.

▪ Calculate net sales.

▪ Multiply net sales by the percentage.

5.02 Journalizing Uncollectible Accounts Receivable Using the Direct Write-Off Method – Handout – SW

The direct write-off method is used primarily by small businesses and those with few charge customers. When the business determines that the amount owed by an individual customer is not going to be paid, that uncollectible account is removed from the accounting records.

Writing Off an Uncollectible Account

On June 4th, On Your Mark Athletic Wear sold football equipment on account to Robert Galvin for $275.00. On Your Mark has been unable to collect this amount over the past year. It is now apparent that Robert Galvin is not going to pay the $275.00.

The entry to remove the uncollectible account is as follows:

Debit Uncollectible Accounts Expense $275.00

Credit Accounts Receivable/Robert Galvin $275.00

Collecting a Written-Off Account

On September 5th, On Your Mark received $275.00 from Robert Galvin, whose account was previously written off as uncollectible. The entries to reinstate the account receivable and record the payment are as follows:

Debit Accounts Receivable/Robert Galvin $275.00

Credit Uncollectible Accounts Expense $275.00

Debit Cash $275.00

Credit Accounts Receivable/Robert Galvin $275.00

5.02 Journalizing Uncollectible Accounts Receivable Using the Direct Write-Off Method – Guided Practice – SW

Writing Off an Uncollectible Account

On June 4th, Mountain Sports Gear sold hiking equipment on account to Scott Smith for $180.00. Mountain Sports Gear has been unable to collect this amount over the past year. It is now apparent that Scott Smith is not going to pay the $180.00.

The entry to remove the uncollectible account is as follows:

Debit $

Credit $

Collecting a Written-Off Account

On September 5th, On Your Mark received $275.00 from Robert Galvin, whose account was previously written off as uncollectible. The entries to reinstate the account receivable and record the payment are as follows:

Debit $

Credit $

Debit $

Credit $

5.02 Journalizing Uncollectible Accounts Receivable Using the Direct Write-Off Method – Guided Practice – SW

Writing Off an Uncollectible Account

On June 4th, Mountain Sports Gear sold hiking equipment on account to Scott Smith for $180.00. Mountain Sports Gear has been unable to collect this amount over the past year. It is now apparent that Scott Smith is not going to pay the $180.00.

The entry to remove the uncollectible account is as follows:

Debit Uncollectible Accounts Expense $180.00

Credit Accounts Receivable/Scott Smith $180.00

Collecting a Written-Off Account

On September 5th, On Your Mark received $275.00 from Robert Galvin, whose account was previously written off as uncollectible. The entries to reinstate the account receivable and record the payment are as follows:

Debit Accounts Receivable/Robert Galvin $180.00

Credit Uncollectible Accounts Expense $180.00

Debit Cash $180.00

Credit Accounts Receivable/Robert Galvin $180.00

5.02 Journalizing Uncollectible Accounts Receivable Using the Direct Write-Off Method – Independent Practice – SW

Writing Off an Uncollectible Account

On August 10th, Sunset Surfwear sold a surfboard on account to Mary Adams for $675.00. Sunset Surfwear has been unable to collect this amount over the past year. It is now apparent that Mary Adams is not going to pay the $675.00.

What is the entry to remove the uncollectible account from the accounting records of Sunset Surfwear?

Debit $

Credit $

Collecting a Written-Off Account

On December 5th, Sunset Surfwear received $675.00 from Mary Adams, whose account was previously written off as uncollectible.

What is the entry to reinstate the account?

Debit $

Credit $

What is the entry to record the payment from Mary Adams?

Debit $

Credit $

5.02 Journalizing Uncollectible Accounts Receivable Using the Direct Write-Off Method – Independent Practice – SW

Writing Off an Uncollectible Account

On August 10th, Sunset Surfwear sold a surfboard on account to Mary Adams for $675.00. Sunset Surfwear has been unable to collect this amount over the past year. It is now apparent that Mary Adams is not going to pay the $675.00.

What is the entry to remove the uncollectible account from the accounting records of Sunset Surfwear?

Debit Uncollectible Accounts Expense $675.00

Credit Accounts Receivable/Mary Adams $675.00

Collecting a Written-Off Account

On December 5th, Sunset Surfwear received $675.00 from Mary Adams, whose account was previously written off as uncollectible.

What is the entry to reinstate the account?

Debit Accounts Receivable/Mary Adams $675.00

Credit Uncollectible Accounts Expense $675.00

What is the entry to record the payment from Mary Adams?

Debit Cash $675.00

Credit Accounts Receivable/Mary Adams $675.00

5.02 Key Terms – BLANK

|TERM |DEFINITION |

|Uncollectible account | |

|Writing off an account | |

|Allowance for Uncollectible Accounts | |

|Uncollectible Accounts Expense | |

|Direct write-off method | |

|Allowance method | |

|Book value of accounts receivable | |

|Percentage of net sales | |

|Aging of accounts receivable | |

| | |

| | |

| | |

| | |

| | |

5.02 Key Terms – DEFINED

|TERM |DEFINITION |

|Uncollectible account |An Accounts Receivable account that cannot be collected |

|Writing off an account |Canceling the balance of a customer account because the customer does not pay |

|Allowance for Uncollectible Accounts |Contra asset account for Accounts Receivable |

|Uncollectible Accounts Expense |Expense account used to record the expense incurred when an Accounts Receivable customer does |

| |not pay |

|Direct write-off method |Method of accounting for bad debts used by a business to remove from the accounting records an |

| |individual account determined to be uncollectible |

|Allowance method |Method used by a business to record the estimated uncollectible accounts expense in the same |

| |fiscal year as the related sales are recorded |

|Book value of accounts receivable |Difference between Accounts Receivable and Allowance for Uncollectible Accounts |

|Percentage of net sales |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 |

|Aging of accounts receivable |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 accounts are added to determine the end-of-period balance in Allowance |

| |for Uncollectible Accounts |

5.02 Prototype Assessment Items

These prototype assessment items illustrate the types of items used in the item bank for this objective. All items have been written to match the cognitive process of the apply verb in the objectives. These exact questions will not be used on the secure postassessment, but questions in similar formats will be used.

Writing Off Uncollectible Accounts Receivable Using the Direct Write-Off Method

1. Business Machines uses the direct write-off method when handling uncollectible accounts receivable. Wally's Word Processing owes $400.00 on account. Mountain Business Services has determined this account to be uncollectible. Which is the correct entry for writing off this account?

A. Debit Accounts Receivable/Wally's Word Processing, $400.00; Credit Uncollectible Accounts Expense, $400.00

B. Debit Accounts Receivable/Wally's Word Processing, $400.00; Credit Allowance for Uncollectible Accounts, $400.00

C. Debit Uncollectible Accounts Expense, $400.00; Credit Accounts Receivable/ Wally's Word Processing, $400.00

D. Debit Uncollectible Accounts Expense, $400.00; Credit Allowance for Uncollectible Accounts, $400.00

Estimating and Recording Uncollectible Accounts Expense Using the Percentage of Sales Allowance Method

2. Madison Company estimates uncollectible accounts expense by calculating a percentage of total sales on account. Total sales on account for the year are $200,000.00. In the past, actual uncollectible accounts expense has been about 2.0% of total sales on account. What is the estimated uncollectible accounts expense for the year?

A. $40.00

B. $400.00

C. $4,000.00

D. $40,000.00

Journalizing Collection of Uncollectible Accounts Receivable

3. Smart Shoe Supplies received a check for $400.00 from Sam's Shoes, whose account was previously written off using the Allowance Method. What is the correct entry to re-open the account for Sam's Shoes?

A. Debit Accounts Receivable/Sam's Shoes, $400.00; Credit Allowance for Uncollectible Accounts, $400.00

B. Debit Accounts Receivable/Sam's Shoes, $400.00; Credit Uncollectible Accounts Expense, $400.00

C. Debit Uncollectible Accounts Expense, $400.00; Credit Accounts Receivable/ Sam's Shoes, $400.00

D. Debit Uncollectible Accounts Expense, $400.00; Credit Allowance for Uncollectible Accounts, $400.00

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