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The asset reported on the balance sheet, net accounts receivable, must be the amount you expect to be a future benefit. There is no benefit to an uncollectible accounts receivable. The accounts that are used to record accounts receivable transactions are: Sales represents the amount of goods or services provided Accounts receivable represents the amount the customer owes Allowance for doubtful accounts represents the total amount you do not expect to collect it is an estimate, you dont know who wont pay or how much Uncollectible accounts expense the current period estimate of what you wont collect There are 4 key transactions that must be recorded for accounts receivables: 1. The sale on credit, which creates the accounts receivable 2. The collection of the accounts receivable when a customer pays 3. The estimate of uncollectible accounts expense: you dont know exactly how much wont be collected from customers, but you know you wont collect it all from past history. You must estimate the expense at the end of the period to match with sales. 4. The write off of an accounts receivable when you know who wont pay you and exactly how much wont be collected. This occurs much later after the sale. Journal entries for the 4 transactions are: Sales on credit Accounts Receivable Sales Collect accounts receivable Cash Dr. Accounts Receivable Cr. Estimate uncollectible accounts expense: Uncollectible account expense Dr. Dr. Cr.
Write off accounts receivable: Allowance for doubtful accounts Accounts Receivable Dr. Cr.
The accounts are changed by the following transactions: Accounts Receivable: Increases when a sale is made on credit. Decreases when the customer pays Decreases when an account is written off you know who wont pay and amount Allowance for Uncollectible Accounts: Increases when estimating bad debt expense using % sales method Increases or decreases when estimating bad debt expense using % of accounts receivable (the up or down depends on how much is already in the account) Decreases when an account is written off The allowance account represents the total estimate of what wont be collected. The company is not sure who wont pay or exactly how much. When they know who and how much wont pay, they take it out of this account and take it off the accounts receivable list and out of the accounts receivable account. Uncollectible Accounts Expense: Changes ONLY when you estimate bad debt at the end of the period if you overestimated in prior periods you can adjust the balance in the next period while estimating the allowance for doubtful accounts. The bad debt expense must be recorded in the same period the sale is made. (This follows the matching principle: match revenues with all expenses) Problem: You dont know how much you wont collect in the period of the sale. You wont know until much later when the customer doesnt pay. Solution: You must estimate, (based on past history) the amount you wont collect and record this expense in the same period as the sale.
5. To reinstate Customer A when the balance is subsequently paid: July 10 Accounts Receivable-Customer A 1,000 Allowance for Doubtful Accounts 1,000 July 10 Cash 1,000 Accounts Receivable-Customer A 1,000 Example #1: Journalize the following transactions. 2001 12/31 Estimated that $7,000 of accounts receivable would become uncollectible. 2002 1/05 Wrote-off the $800 balance owed by Jane Camp and the $500 balance owed by Friends, Inc. 3/18 Reinstated the account of Jane Camp that had been written off as Uncollectible and recorded receipt of the $800 cash in full payment. Solution #1 2001 12/31 Uncollectible Accounts Expense 7,000 Allowance for Doubtful Accounts 7,000 2002 01/05 Allowance for Doubtful Accounts 1,300 Accounts Receivable Jane Camp 800 Accounts Receivable Friends, Inc. 500 03/18 Accounts Receivable Jane Camp 800 Allowance for Doubtful Accounts 800 Cash 800
Solution a. 4,000,000 * .0025 = $10,000 b. Uncollectible Accounts Expense 10,000 Allowance for Doubtful Accounts 10,000 c. $300 credit balance + 10,000 additional credit = $10,300 credit balance
3. Redo the entry of 12/31and questions 1 and 2, if the percent of sales method had been used to estimate uncollectible accounts at the rate of of 1% of net sales of $2,000,000.