5.

02 - NOTES

Students must understand the concepts listed below to be able to apply the procedures to
prepare journal entries related to uncollectible accounts.
 Uncollectible Accounts
 Uncollectible accounts are accounts receivable that cannot be collected.
 The adjustment for uncollectible accounts expense is recorded as an adjusting entry
in the general journal.
 Writing Off an Uncollectible Account Using the Direct Write-Off Method
 The direct write-off method is used primarily by small businesses and those with few
charge customers.
 When the business determines that the amount owed by an individual customer is
not going to be paid, that uncollectible account is removed from the accounting
records.
 The direct write-off method is the only method a business can use for income tax
purposes.
 Estimating and Recording Uncollectible Accounts Expense Using the Allowance Method
 The allowance method of recording losses from uncollectible accounts attempts to
record the expense of uncollectible accounts in the same fiscal year as the related
sales are recorded.
 An estimate of the uncollectible accounts is recorded to the contra asset account
Allowance for Uncollectible Accounts and the expense account Uncollectible
Accounts Expense (Bad Debts Expense).
 Estimate uncollectible accounts expense by calculating a percentage of total
sales on account.
 The allowance method of estimating uncollectible accounts expense (percentage
of total sales on account) assumes that a portion of every dollar of sales on
account will become uncollectible.
 At the end of a fiscal period, an adjustment for uncollectible accounts expense is
planned on a worksheet. This adjustment is recorded on the worksheet as an
adjusting entry.
 Collecting Uncollectible Accounts Receivable
 Occasionally, after an account is written off, the customer pays the delinquent
account. Several accounts must be changed to recognize payment of a written-
off account receivable.
 Two entries are recorded for the collection of a written-off account receivable.

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 CONTENT

I. Procedure for Journalizing Uncollectible Accounts Receivable Using the Direct

Write-Off Method
A. Debit Uncollectible Accounts Expense.
B. Credit Accounts Receivable/Customer’s account.

II. Procedure for Estimating Uncollectible Accounts Expense and Journalizing the
Adjusting Entry Using the Allowance Method
A. Total sales X Percentage of sales expected to be uncollectible = Uncollectible
Accounts Expense
B. Adjustment for uncollectible accounts expense
1. Debit Uncollectible Accounts Expense.
2. Credit Allowance for Uncollectible Accounts.

III. Procedure for Journalizing the Collection of Uncollectible Accounts Receivable

A. Re-open an account receivable previously written off
1. Debit Accounts Receivable/Customer’s account.
2. Credit Allowance for Uncollectible Accounts.
B. Record cash received for an account previously written off
1. Debit Cash.
2. Credit Accounts Receivable/Customer’s account.

KEY TERMS

 Uncollectible account
 Writing off an account
 Allowance for Uncollectible
Accounts
 Uncollectible Accounts Expense
 Direct write-off method
 Allowance method
 Book value of accounts receivable
 Percentage of net sales
 Aging of accounts

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5.02 Journalizing Uncollectible Accounts Receivable

An or bad debt is an
account receivable that the business cannot collect. Businesses account
for bad debts by using
 the direct write-off method, or
 the allowance method.

The method of accounting for bad

debts is primarily used by businesses with few credit customers. When it is
determined that an individual customer is not going to pay, that
uncollectible account is removed from the records.

Writing Off an Uncollectible Account with Direct Write-Off Method

Debit
Credit

Collecting a Written-Off Account with the Direct Write-Off Method

When a written-off account is paid, follow these steps:



To Reinstate the Customer’s Account

Debit
Credit

The allowance method of accounting for bad debts matches the estimated
uncollectible accounts expense with sales made during the same period.
The estimated uncollectible accounts expense is recorded as an
adjustment, which affects two accounts:



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5.02 Journalizing Uncollectible Accounts Receivable – Page 2

The is the
difference between and
. It is the amount
the business can expect to collect from its accounts receivable.

Writing Off an Uncollectible Account with Allowance Method

Debit
Credit

Collecting a Written-Off Account with the Allowance Method

When a written-off account is paid, follow these steps:



To Reinstate the Customer’s Account with the Allowance Method

Debit
Credit

___ is a method of estimating the

amount of uncollectible accounts in which a business assumes that a
certain percentage of each year’s sales will be uncollectible. To find the
adjustment for Uncollectible Accounts Expense:




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5.02 Journalizing Uncollectible Accounts Receivable

An uncollectible account or bad debt is an account receivable that the

business cannot collect. Businesses account for bad debts by using
 the direct write-off method, or
 the allowance method.

The direct write-off method of accounting for bad debts is primarily used
by businesses with few credit customers. When it is determined that an
individual customer is not going to pay, that uncollectible account is
removed from the records.

Writing Off an Uncollectible Account with Direct Write-Off Method

Debit Uncollectible Accounts Expense
Credit Accounts Receivable/Customer’s account

Collecting a Written-Off Account with the Direct Write-Off Method

When a written-off account is paid, follow these steps:
 Reinstate the customer’s account.
 Record the cash receipt.

To Reinstate the Customer’s Account

Debit Accounts Receivable/Customer’s account
Credit Uncollectible Accounts Expense

The allowance method of accounting for bad debts matches the estimated
uncollectible accounts expense with sales made during the same period.
The estimated uncollectible accounts expense is recorded as an
adjustment, which affects two accounts:
 Uncollectible Accounts Expense
 Allowance for Uncollectible Accounts

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5.02 Journalizing Uncollectible Accounts Receivable – Page 2

The book value of accounts receivable is the difference between

Accounts Receivable and Allowance for Uncollectible Accounts. It is
the amount the business can expect to collect from its accounts receivable.

Writing Off an Uncollectible Account with Allowance Method

Debit Allowance for Uncollectible Accounts
Credit Accounts Receivable/Customer’s account

Collecting a Written-Off Account with the Allowance Method

When a written-off account is paid, follow these steps:
 Reinstate the customer’s account.
 Record the cash receipt.

To Reinstate the Customer’s Account with the Allowance Method

Debit Accounts Receivable/Customer’s account
Credit Allowance for Uncollectible Accounts

Percentage of net sales is a method of estimating the amount of

uncollectible accounts in which a business assumes that a certain
percentage of each year’s sales will be uncollectible. To find the
adjustment for Uncollectible Accounts Expense:
 Determine the percentage.
 Calculate net sales.
 Multiply net sales by the percentage.

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5.02 Journalizing Uncollectible Accounts Receivable Using
the Direct Write-Off Method – Handout – SW

The direct write-off method is used primarily by small businesses and those
with few charge customers. When the business determines that the
amount owed by an individual customer is not going to be paid, that
uncollectible account is removed from the accounting records.

Writing Off an Uncollectible Account

On June 4th, On Your Mark Athletic Wear sold football equipment on

account to Robert Galvin for $275.00. On Your Mark has been unable to
collect this amount over the past year. It is now apparent that Robert
Galvin is not going to pay the $275.00.

The entry to remove the uncollectible account is as follows:

Debit Uncollectible Accounts Expense $275.00

Credit Accounts Receivable/Robert Galvin $275.00

Collecting a Written-Off Account

On September 5th, On Your Mark received $275.00 from Robert Galvin,

whose account was previously written off as uncollectible. The entries to
reinstate the account receivable and record the payment are as follows:

Debit Accounts Receivable/Robert Galvin $275.00

Credit Uncollectible Accounts Expense $275.00

Debit Cash $275.00

Credit Accounts Receivable/Robert Galvin $275.00

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5.02 Journalizing Uncollectible Accounts Receivable Using the
Direct Write-Off Method – Guided Practice – SW

Writing Off an Uncollectible Account

On June 4th, Mountain Sports Gear sold hiking equipment on account to

Scott Smith for $180.00. Mountain Sports Gear has been unable to collect
this amount over the past year. It is now apparent that Scott Smith is not
going to pay the $180.00.

The entry to remove the uncollectible account is as follows:

Debit $

Credit $

Collecting a Written-Off Account

On September 5th, On Your Mark received $275.00 from Robert Galvin,

whose account was previously written off as uncollectible. The entries to
reinstate the account receivable and record the payment are as follows:

Debit $

Credit $

Debit $

Credit $

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5.02 Journalizing Uncollectible Accounts Receivable Using the
Direct Write-Off Method – Guided Practice – SW

Writing Off an Uncollectible Account

On June 4th, Mountain Sports Gear sold hiking equipment on account to

Scott Smith for $180.00. Mountain Sports Gear has been unable to collect
this amount over the past year. It is now apparent that Scott Smith is not
going to pay the $180.00.

The entry to remove the uncollectible account is as follows:

Debit Uncollectible Accounts Expense $180.00

Credit Accounts Receivable/Scott Smith $180.00

Collecting a Written-Off Account

On September 5th, On Your Mark received $275.00 from Robert Galvin,

whose account was previously written off as uncollectible. The entries to
reinstate the account receivable and record the payment are as follows:

Debit Accounts Receivable/Robert Galvin $180.00

Credit Uncollectible Accounts Expense $180.00

Debit Cash $180.00

Credit Accounts Receivable/Robert Galvin $180.00

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5.02 Journalizing Uncollectible Accounts Receivable Using
the Direct Write-Off Method – Independent Practice – SW

Writing Off an Uncollectible Account

On August 10th, Sunset Surfwear sold a surfboard on account to Mary

Adams for $675.00. Sunset Surfwear has been unable to collect this
amount over the past year. It is now apparent that Mary Adams is not
going to pay the $675.00.

What is the entry to remove the uncollectible account from the accounting
records of Sunset Surfwear?

Debit $

Credit $

Collecting a Written-Off Account

On December 5th, Sunset Surfwear received $675.00 from Mary Adams,

whose account was previously written off as uncollectible.

What is the entry to reinstate the account?

Debit $

Credit $

What is the entry to record the payment from Mary Adams?

Debit $

Credit $

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5.02 Journalizing Uncollectible Accounts Receivable Using
the Direct Write-Off Method – Independent Practice – SW

Writing Off an Uncollectible Account

On August 10th, Sunset Surfwear sold a surfboard on account to Mary

Adams for $675.00. Sunset Surfwear has been unable to collect this
amount over the past year. It is now apparent that Mary Adams is not
going to pay the $675.00.

What is the entry to remove the uncollectible account from the accounting
records of Sunset Surfwear?

Debit Uncollectible Accounts Expense $675.00

Credit Accounts Receivable/Mary Adams $675.00

Collecting a Written-Off Account

On December 5th, Sunset Surfwear received $675.00 from Mary Adams,

whose account was previously written off as uncollectible.

What is the entry to reinstate the account?

Debit Accounts Receivable/Mary Adams $675.00

Credit Uncollectible Accounts Expense $675.00

What is the entry to record the payment from Mary Adams?

Debit Cash $675.00

Credit Accounts Receivable/Mary Adams $675.00

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5.02 Key Terms – BLANK

TERM DEFINITION
Uncollectible account

Writing off an account

Allowance for Uncollectible

Accounts

Uncollectible Accounts Expense

Direct write-off method

Allowance method

Book value of accounts receivable

Percentage of net sales

Aging of accounts receivable

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5.02 Key Terms – DEFINED
TERM
Uncollectible account
Writing off an account
Allowance for Uncollectible
Accounts
Uncollectible Accounts Expense
Direct write-off method
Allowance method
Book value of accounts receivable
Percentage of net sales
Aging of accounts receivable
6311 Accounting I
DEFINITION
An Accounts Receivable account that cannot be
collected
Canceling the balance of a customer account because
the customer does not pay
Contra asset account for Accounts Receivable
Expense account used to record the expense incurred
when an Accounts Receivable customer does not pay
Method of accounting for bad debts used by a
business to remove from the accounting records an
individual account determined to be uncollectible
Method used by a business to record the estimated
uncollectible accounts expense in the same fiscal year
as the related sales are recorded
Difference between Accounts Receivable and
Allowance for Uncollectible Accounts
A method of estimating uncollectible accounts
expense in which a business assumes that a certain
percentage of each year’s net sales will be
uncollectible
A method of estimating the uncollectible accounts
expense in which each customer’s account is
classified by age, the age classifications are multiplied
by certain percentages, and the total estimated
uncollectible accounts are added to determine the
end-of-period balance in Allowance for Uncollectible
Accounts
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