Section 2 The Allowance MethodWhat You’ll Learn

The concept of matching uncollectible accounts with revenue.

The allowance method of accounting for uncollectible accounts.

How to record the adjustment for uncollectible accounts on the work sheet.

How to record estimated uncollectible amounts on the financial statements.

What You’ll Learn (cont'd.)

How to journalize the adjusting entry for uncollectible accounts.

How write off an uncollectible account receivable using the allowance method.

How to record the collection of an account written off by the allowance.

Section 2 The Allowance Method (cont'd.)

Why It’s Important

The allowance method of accounting

for uncollectible accounts conforms to

the matching principle.

Key Terms

allowance method

book value of accounts receivable

Section 2 The Allowance Method (cont'd.)

Matching Uncollectible Accounts Expense with Revenue One of the fundamental principles of

accounting is that revenue should be matched with the expenses incurred in generating that revenue.

This means that expenses incurred to earn revenue should be deducted in the same period in which the revenue is recorded.

The uncollectible accounts expense should be reported in the year in which the sale takes place.

Section 2 The Allowance Method (cont'd.)

The Allowance Method

Matches the estimated uncollectible accounts expense with sales made during the same period.

At the end of the period, an estimate is made of the amount of uncollectible accounts that will result from the sales made during the period.

Section 2 The Allowance Method (cont'd.)

The Allowance Method (cont'd.)

Allowance for Uncollectible Accounts is used to summarize the estimated uncollectible accounts receivable.

Section 2 The Allowance Method (cont'd.)

Allowance for Uncollectible AccountsDebit

–Decrease Side

Credit+

Increase SideNormal Balance

Reporting Estimated Uncollectible Amounts on the Financial Statements

Section 2 The Allowance Method (cont'd.)

Writing Off Uncollectible Amounts Receivable

Section 2 The Allowance Method (cont'd.)

Business TransactionOn April 18, after many attempts to collect the amount

owed, On Your Mark decides to write off the account of Megan Sullivan for $150, Memorandum 236.

JOURNAL ENTRY

Collecting an Account Written Off by the Allowance Method

Section 2 The Allowance Method (cont'd.)

Business TransactionOn November 19, On Your Mark received a check for

$150 from Megan Sullivan, whose account was written off April 18, Memorandum 294 and Receipt 2243.

JOURNAL ENTRY

Check Your Understanding

Explain the use of the

allowance method of accounting

for uncollectible accounts.

Section 2 The Allowance Method (cont'd.)