Chapter 15

Uncollectible Accounts

College Accounting
10th Edition

McQuaig

McQuaig
Bille

Bille

Nobles
PowerPoint presented by Douglas Cloud
Professor Emeritus of Accounting, Pepperdine
151
2011 Cengage Learning
University

Two
Two Methods
Methods of
of Accounting
Accounting for
for
Uncollectible
Uncollectible Accounts
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.
152

The
The Credit
Credit Department
Department
The Credit Department evaluates the debtpaying ability of prospective customers and
determines the maximum amount of credit to
extend to each customer.
Credit managers oversee the firms issuance
of credit, establish credit-rating criteria,
determine credit ceilings, and monitor the
collections of past-due accounts.
A credit manager must have a bachelors
degree in finance, accounting, economics, or
business administration as a minimum.
153

The
The Allowance
Allowance Method
Method of
of
Accounting
Accounting for
for Bad
Bad Debts
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).

Link:
https://www.youtube.com/watch?v=meiU6T
xysCg
154

The
The Allowance
Allowance Method
Method of
of
Accounting
Accounting for
for Bad
Bad Debts
Debts
The general journal and T account form show the
adjusting entry for the estimated bad debt losses
for Huan Company.

155

The
The Allowance
Allowance Method
Method of
of
Accounting
Accounting for
for Bad
Bad Debts
Debts
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.
156

Bad
Bad Debts
Debts Expense
Expense and
and Allowance
Allowance for
for
Doubtful
Doubtful Accounts
Accounts on
on Financial
Financial Statements
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.
157

The
The Allowance
Allowance Method
Method of
of
Accounting
Accounting for
for Bad
Bad Debts
Debts
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
158

Adjusting
Adjusting Entry
Entry Based
Based on
on Aging
Aging
Accounts
Accounts Receivable
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 customers 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.
159

Aging
Aging Accounts
Accounts Receivable
Receivable

Adjusting
Adjusting Entry
Entry Based
Based on
on Aging
Aging
Accounts
Accounts Receivable
Receivable
The adjusting entry is made large enough to make
the balance of Allowance for Doubtful Accounts
the same as the estimated uncollectible accounts.

1511

Adjusting
Adjusting Entry
Entry Based
Based on
on Aging
Aging
Accounts
Accounts Receivable
Receivable

1512

Adjusting
Adjusting Entry
Entry Based
Based on
on
Estimating
Estimating Bad
Bad Debts
Debts as
as aa
Percentage
Percentage of
of Accounts
Accounts Receivable
Receivable
Raymond Companys adjustments for
uncollectible accounts:

The firms average loss over three consecutive

years is: $4,640/$151,000 = .03 = 3%.
1513

Adjusting
Adjusting Entry
Entry Based
Based on
on
Estimating
Estimating Bad
Bad Debts
Debts as
as aa
Percentage
Percentage of
of Accounts
Accounts Receivable
Receivable
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).

1514

Adjusting
Adjusting Entry
Entry Based
Based on
on
Estimating
Estimating Bad
Bad Debts
Debts as
as aa
Percentage
Percentage of
of Accounts
Accounts Receivable
Receivable
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).

1515

Adjusting
Adjusting Entry
Entry Based
Based on
on
Estimating
Estimating Bad
Bad Debts
Debts as
as aa
Percentage
Percentage of
of Accounts
Accounts Receivable
Receivable

1516

Adjusting
Adjusting Entry
Entry Based
Based on
on Estimating
Estimating
Bad
Bad Debts
Debts as
as aa Percentage
Percentage of
of Net
Net
Sales
Sales or
or Net
Net Credit
Credit Sales
Sales
Estimate Based on Net Sales

Net Sales
1517

Adjusting
Adjusting Entry
Entry Based
Based on
on Estimating
Estimating
Bad
Bad Debts
Debts as
as aa Percentage
Percentage of
of Net
Net
Sales
Sales or
or Net
Net Credit
Credit Sales
Sales
Estimate Based on Net Sales
One percent of net sales is $6,815 ($681,500 x .
01), so the firm uses this amount directly for the
adjusting entry.

1518

Adjusting
Adjusting Entry
Entry Based
Based on
on Estimating
Estimating
Bad
Bad Debts
Debts as
as aa Percentage
Percentage of
of Net
Net
Sales
Sales or
or Net
Net Credit
Credit Sales
Sales
Estimate Based on Net Credit Sales
Credit (charge) sales
Less: Sales Returns and Allowances
Sales Discounts
Net credit sales

$736,000
$25,200
5,200

30,400
$705,600

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

1519

Adjusting
Adjusting Entry
Entry Based
Based on
on Estimating
Estimating
Bad
Bad Debts
Debts as
as aa Percentage
Percentage of
of Net
Net
Sales
Sales or
or Net
Net Credit
Credit Sales
Sales
Estimate Based on Net Credit Sales

Note: The present balance of Allowance for Doubtful

Accounts is not involved in determining the amount of
the adjusting entry.
1520

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

1521

Accounts
Accounts Receivable
Receivable Turnover
Turnover
Assume the following information for 2011 and
2010 for Southern Office Furniture.
Net sales on account (from the sales
journal)
Beginning accounts receivable
(from Accounts Receivable account)
Ending accounts receivable (from
Accounts Receivable account)

2011

2010

$330,000 $302,000
39,680

37,500

45,840

39,680

1522

Accounts
Accounts Receivable
Receivable Turnover
Turnover

1523

Closing
Closing the
the Bad
Bad Debts
Debts
Expense
Expense Account
Account
Before Closing

1524

Closing
Closing the
the Bad
Bad Debts
Debts
Expense
Expense Account
Account
After Closing

1525

Entry
Entry to
to Write
Write Off
Off aa Charge
Charge
Account
Account in
in Full
Full
Write Off Entry in the General Journal

1526

Entry
Entry to
to Write
Write Off
Off aa Charge
Charge
Account
Account in
in Full
Full
Write Off Entry in the T Accounts

1527

Entry
Entry to
to Write
Write Off
Off aa Charge
Charge
Account
Account in
in Full
Full
Accounts Receivable Ledger Account

1528

Entry
Entry to
to Write
Write Off
Off aa Charge
Charge
Account
Account in
in Full
Full
Net Realizable Value

Note that the book value does not

change because of the write-off.
1529

Entry
Entry to
to Write
Write Off
Off aa Charge
Charge
Account
Account Paid
Paid in
in Part
Part
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.

1530

Compound
Compound Entry
Entry to
to Write
Write Off
Off aa
Number
Number of
of Accounts
Accounts as
as Uncollectible
Uncollectible
On December 31, Olney Company writes off
several accounts as uncollectible.

1531

Collection
Collection of
of Accounts
Accounts
Previously
Previously Written
Written Off
Off
Parsons Company sells merchandise on account
to P. Nichols for $585 on May 5, 2010.

1532

Collection
Collection of
of Accounts
Accounts
Previously
Previously Written
Written Off
Off
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.

1533

Collection
Collection of
of Accounts
Accounts
Previously
Previously Written
Written Off
Off
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.

Collection
Collection of
of Accounts
Accounts
Previously
Previously Written
Written Off
Off
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.

1535

Collection
Collection of
of Accounts
Accounts
Previously
Previously Written
Written Off
Off
The second entry records the collection of cash.

1536

Specific
Specific Charge-Off
Charge-Off
of
of Bad
Bad Debts
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.

1537

Specific
Specific Charge-Off
Charge-Off
of
of Bad
Bad Debts
Debts
Mitchell never paid his bill. Finally, three years
later, on September 1, the accounting writes off
the Mitchell account.

1538

Specific
Specific Charge-Off
Charge-Off
of
of Bad
Bad Debts
Debts
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.

1539