15–1 mcquaig bille 1 college accounting 10 th edition mcquaig bille nobles © 2011 cengage...

15–1McQuaig Bille

11College Accounting10th Edition

McQuaig Bille Nobles

© 2011 Cengage Learning

PowerPoint presented by Douglas Cloud Professor Emeritus of Accounting, Pepperdine University

Chapter 15

Uncollectible Accounts

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Two Methods of Accounting for Uncollectible Accounts

Two Methods of Accounting for Uncollectible Accounts

The allowance method is consistent with the matching principle, in that it enables firms to match sales of one period with bad debt losses of the same period.

The specific charge-off method traditionally has been used by small businesses. It is the only method approved for federal income tax purposes.

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The Credit DepartmentThe Credit Department

The Credit Department evaluates the debt-paying ability of prospective customers and determines the maximum amount of credit to extend to each customer.

Credit managers oversee the firm’s issuance of credit, establish credit-rating criteria, determine credit ceilings, and monitor the collections of past-due accounts.

A credit manager must have a bachelor’s degree in finance, accounting, economics, or business administration as a minimum.

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The Allowance Method of Accounting for Bad DebtsThe Allowance Method of Accounting for Bad Debts

Most big firms use the allowance method of accounting for bad debt losses for financial reporting, which is consistent with generally accepted accounting practices (GAAP).

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The general journal and T account form show the adjusting entry for the estimated bad debt losses for Huan Company.

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The purpose of the adjusting entry is to increase Bad Debts Expense by the amount of the estimated loss and to produce a collectible figure for the book value of Accounts Receivable.

Allowance for Doubtful Accounts is classified as a deduction from Accounts Receivable; it is a contra account.

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Bad Debts Expense and Allowance for Doubtful Accounts on Financial Statements

Bad Debts Expense and Allowance for Doubtful Accounts on Financial Statements

Bad Debts Expense appears on the income statement as an operating expense.

If a firm subdivides operating expenses into selling expenses and general expenses, then they list Bad Debts Expense as a general expense.

Allowance for Doubtful Accounts is listed immediately below Accounts Receivable in the Current Assets section of the balance sheet.

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Three ways can be used to estimate the amount of bad debts expense:

1.Based on the aging of Accounts Receivable

2.Based on a percentage of Accounts Receivable

3.Based on a percentage of net sales or net credit sales

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Adjusting Entry Based on Aging Accounts Receivable


The most common technique for estimating the total uncollectible amount of Accounts Receivable is based on aging of Accounts Receivable.

When a company uses the aging method, each charge customer’s account “is aged” by:

1) determining the age, in numbers of days, of each account and

2) determining the number of days the account is past due.

Aging Accounts ReceivableAging Accounts Receivable

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The adjusting entry is made large enough to make the balance of Allowance for Doubtful Accounts the same as the estimated uncollectible accounts.



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Adjusting Entry Based on Estimating Bad Debts as a

Percentage of Accounts Receivable



The firm’s average loss over three consecutive years is: $4,640/$151,000 = .03 = 3%.

Raymond Company’s adjustments for uncollectible accounts:

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At the end of 2013, the balance of Accounts Receivable is $60,100 and the credit balance of Allowance for Doubtful Accounts is $285.

The company estimates the uncollectibles to be $1,803 ($60,100 x .03).

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When the figure for the adjustment is based on a percentage of Accounts Receivable, you make an adjusting entry to bring the Allowance for Doubtful Accounts balance up to the desire number ($1,803 – $285 = $1,518).

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Adjusting Entry Based on Estimating Bad Debts as a Percentage of Net

Sales or Net Credit Sales



Estimate Based on Net Sales

Net Sales

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One percent of net sales is $6,815 ($681,500 x .01), so the firm uses this amount directly for the adjusting entry.

Estimate Based on Net Sales

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Credit (charge) sales $736,000Less: Sales Returns and Allowances $25,200

Sales Discounts 5,200 30,400Net credit sales $705,600

$705,600 x .0075 = $5,292

Estimate Based on Net Credit Sales

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Note: The present balance of Allowance for Doubtful Accounts is not involved in determining the amount of the adjusting entry.

Estimate Based on Net Credit Sales

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Accounts receivable turnover is the number of times charge accounts are turned over (paid off) during a given year.

Accounts Receivable TurnoverAccounts Receivable Turnover

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Assume the following information for 2011 and 2010 for Southern Office Furniture.

Net sales on account (from the sales journal) $330,000 $302,000Beginning accounts receivable (from Accounts Receivable account) 39,680 37,500Ending accounts receivable (from Accounts Receivable account) 45,840 39,680

2011 2010

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Closing the Bad Debts Expense Account


Before Closing

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After Closing

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Entry to Write Off a Charge Account in Full


Write Off Entry in the General Journal

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Write Off Entry in the T Accounts

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Accounts Receivable Ledger Account

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Note that the book value does not change because of the write-off.



Net Realizable Value

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On April 21, Paschal Company received 10 cents on the dollar (10 percent) in settlement of a $683 account owed by its customer, R. L. Renk, a bankrupt customer.

Entry to Write Off a Charge Account Paid in Part

Entry to Write Off a Charge Account Paid in Part

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Compound Entry to Write Off a Number of Accounts as Uncollectible

Compound Entry to Write Off a Number of Accounts as Uncollectible

On December 31, Olney Company writes off several accounts as uncollectible.

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Parsons Company sells merchandise on account to P. Nichols for $585 on May 5, 2010.

Collection of Accounts Previously Written Off


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Parsons Company makes unsuccessful attempts to collect the Nichols debt, and the statute of limitations finally expires. Parsons cannot collect even by going to court, so the account is written off as a bad debt.



But on Septembers 15, 2013, P. Nichols suddenly pays her account in full. Two entries are required, the first to reverse the write-off entry (which reinstates the account).

The second records the collection.

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What if P. Nichols had gone into bankruptcy and settled her account with Parsons Company by paying it 5 cents on the dollar?

The following entry recognizes the bankruptcy settlement.

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The second entry records the collection of cash.

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Specific Charge-Off of Bad Debts


The specific charge-off method of accounting for bad debt losses is a simpler system for writing off charge accounts determined to be uncollectible.

On April 16, 2010, Roly Company sold merchandise on account to H. R. Mitchell for $182.10.

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Mitchell never paid his bill. Finally, three years later, on September 1, the accounting writes off the Mitchell account.

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This method is easy to use but can cause inaccurate matching of revenue and expense.

This method is used for tax purposes by most businesses, even though they may use the allowance method for financial reporting.

Reinstating Previously Written Off Accounts—Specific Charge-Off Method

Reinstating Previously Written Off Accounts—Specific Charge-Off Method

On May 2, 2014, H. R. Mitchell returns and pays his $182.10 bill.

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Federal Income Tax RequirementFederal Income Tax Requirement

For each account charged off a separate record should be maintained for reporting bad debt losses. This record must contain the following:

1. A description of the debt, including the amount, and the date it became due

2. The name of the debtor

3. The efforts that have been made to collect the debt

4. Why it has been decided that the debt is worthless

15–1 mcquaig bille 1 college accounting 10 th edition mcquaig bille nobles © 2011 cengage...

Documents

aging of accounts receivable

doubtful accounts

allowance method of

aging method

net credit sales slide

balance of allowance

college accounting

methods of accounting