Accounting for Uncollectible Accounts Receivable The Allowance Method This method is consistent with the matching principle Management makes an estimate each year of the portion of accounts receivable that may not be collectible Uncollectible Accounts Expense is debited and Allowance for Doubtful Accounts is credited Actual accounts that prove to be uncollectible are debited to Allowance for Doubtful Accounts and credited to Accounts receivable c7-6
C7 - 6 Accounting for Uncollectible Accounts Receivable • This method is consistent with the matching principle. • Management makes an estimate each year of the portion of accounts receivable that may not be collectible. • Uncollectible Accounts Expense is debited and Allowance for Doubtful Accounts is credited. • Actual accounts that prove to be uncollectible are debited to Allowance for Doubtful Accounts and credited to Accounts Receivable. The Allowance Method
Journal entries- Allowance Method Date Description Debit Credit Dec 31 Uncollectible Accts. Expense 4,000 Allowance for doubtful Acct 4.000 Estimated a total of $4,000 will be uncollectible. Jan, 21 Allowance for doubtful Accts 610 Accts. receivable-J Parker 610 Write off uncollectible account of $610. Jun 10 Accts. Receivable-J Parker 610 Allowance for Doubtful Accts 610 Cash 610 Accts. Receivable-J Parker 610 Reinstate and collect prior account written off. c7-7
C7 - 7 Journal Entries – Allowance Method Date Description Debit Credit Uncollectible Accts. Expense 4,000 Allowance for Doubtful Acct. 4,000 Allowance for Doubtful Accts. 610 Accts. Receivable - J. Parker 610 Accts. Receivable - J. Parker 610 Allowance for Doubtful Accts. 610 Cash 610 Accts. Receivable - J. Parker 610 Estimated a total of $4,000 will be uncollectible. Write off uncollectible account of $610. Reinstate and collect prior account written off. Dec. 31 Jan. 21 Jun. 10
Estimating Uncollectible Accounts Expense The allowance method uses two ways to estimate the amount debited to Uncollectible Accounts Expense 1. Estimate based on a percentage of sales If credit sales for the period are $300,000 and it is estimated that 1% will be uncollectible, the Uncollectible Accounts Expense is $3, 000. 2. Estimate based on analysis of receivables If it is estimated that $3, 390 of the receivables will be uncollectible and the allowance for Uncollectible Accounts is $510, the Uncollectible Accounts Expense is $2, 880( $3, 390-$510). c7-8
C7 - 8 Estimating Uncollectible Accounts Expense 1. Estimate based on a percentage of sales. If credit sales for the period are $300,000 and it is estimated that 1% will be uncollectible, the Uncollectible Accounts Expense is $3,000. 2. Estimate based on analysis of receivables. If it is estimated that $3,390 of the receivables will be uncollectible and the Allowance for Uncollectible Accounts is $510, the Uncollectible Accounts Expense is $2,880 ($3,390 – $510). The allowance method uses two ways to estimate the amount debited to Uncollectible Accounts Expense