Accounts Receivable And Bank Reconciliation Statement

Accounts Receivable:
Amounts owed by customers that result from the sale of goods and services. They are generally classified as currents assets, even if the credit terms extend beyond one year. They are shown in Balance Sheet at Net Realizable Value.

Uncollectible Accounts:
Occur when customers do not pay for items or services purchased on credit. Theyre recorded as an expense in Income Statement.

Allowance for doubtful accounts:

Extra funds from sales, or another source, set aside in order to pay off bad debt if and when it arises.

Recording Estimated Uncollectibles

Assume that Hampson runs a furniture business and makes most of its sales on account. At January 31, the accounts receivable amount to $200,000. On this date, the credit manager estimates that $12,000 of these accounts will be uncollectible. The adjusting entry to record the estimated uncollectibles is:

Uncollectible Accounts expense 12,000 Allowance for doubtful accounts12,000

Balance Sheet Presentation Of Accounts Receivable

Current Assets: Cash $75000 Accounts Receivable 200,000 Less: Allowance for doubtful accounts 12,000 188,000 Inventory 300,000 Total Current Assets 563,000

Writing Off An Accounts Receivable

Recording the writing off an uncollectible accounts: Assume that early in February, Hampson Furniture learns that John Parker has gone out of the business and that $4000 account receivable from this customer is now worthless. The entry to record the write off is:

Allowance for Doubtful Accounts 4000 Accounts Receivable (John Parker) 4000

Monthly Estimates Of Credit Losses

To illustrate assume that at the end of February the credit manager of Hampson Furniture analyzes the accounts receivable and estimates that approximately $15,000 of these accounts will prove uncollectible. Currently, the Allowance for Doubtful Accounts that has a credit balance of only $8000, determined as follows:
Balance at January 31(credit) Less: Accounts Receivable written off (John Parker) Credit balance at February 28 $8000 $12,000 4000

To increase the balance in the allowance account to $15000 at February 28, the month end adjusting entry must add $7000 to the allowance. The entry will be: Uncollectible Accounts Expense 7000 Allowance for Doubtful Accounts 7000

Approaches to Allowance Method

% of Net Credit Sales

Income Statement Approach

% of Accounts Receivable
Aging Method

Balance Sheet Approach

Percentage of Net Credit Sales Method

Example: 2007 Net credit sales(given) Uncollectible Accounts 2% Uncollectible Accounts Expense $23,40,000 Estimated

$46,800

Journal entry: Uncollectible Accounts Expense 46,800 Allowance for Doubtful Accounts 46,800

Aging Method

Aging Method
Assume that the Allowance for Doubtful Accounts has a beginning credit balance of $1,230: Credit balance before Adjustment 1,230 Cr

Adjustment needed for the year

Required year-end balance

13,324 Cr
14,544 Cr

Aging Method
Journal entry:
Uncollectible Accounts Expense 13,324 Allowance for Doubtful Accounts 13,324 To record estimated Uncollectible Accounts.

Recovery Of Accounts Receivable

Recovery of an Uncollectible Account: Assume that on July 1, R. A. Ware pays the $500 amount that Hampson had written off on March 1. The entries will be:
Jul. 1Accounts receivable 500 Allowance for doubtful accounts 500
Jul. 1Cash 500 Accounts receivable
500

Two accounting methods for Uncollectible Accounts

Direct-Write off method Allowance Method

Direct Write-Off Method

This method makes no attempt to match revenue with the expense of Uncollectible Accounts. When a particular customer's account is determined to be uncollectible, it is written off directly to Uncollectible Accounts Expense, as follows: Uncollectible Accounts Expense 250 Accounts Receivable 250

Allowance Method
Assume that on January 10, The ABC company learned that an account receivable that had originated on September 1 in the amount 6000 was worthless because of the bankruptcy of client.

The journal entry to write off this account will be:

Allowance for Doubtful Accounts 6,000
Accounts Receivable 6,000

BANK RECONCILIATION STATEMENT

A bank reconciliation is a schedule explaining any difference between the balance shown in the bank statement and the balance shown in the depositors accounting records. Bank and depositor are maintaining independent records of the deposits. The checks, and the current balance of the bank account.

ILLUSTRATION OF A BANK RECONCILIATION:

THE JULY BANK STATEMENT SENT BY THE BANK TO HAMPSON COMPANY SHOWS A BALANCE OF CASH ON DEPOSITS AT JULY 31 OF $5,000.17. ASSUME THAT ON JULY 31, HAMPSON LEDGER SHOWS A BANK BALANCE OF $4,26.83. THE EMPLOYEE PREPARING THE BANK RECONCILIATION HAS IDENTIFIED THE FOLLOWING RECONCILING ITEMS: A DEPOSIT OF $410.90 MADE AFTER BANKING HOURS ON JULY 31 DOESNOT APPER IN THE BANK STATEMENT.

 FOUR CHECKS ISSUED IN JULY HAVE NOT YET BEEN PAID BY THE BANK. THESE CHECKS ARE: CHECK NO. DATE AMOUNT 801 JULY 15 $100.00 888 JULY 24 $10.25 890 JULY 27 $402.50 891 JULY 30 $205.00 TWO CREDIT MEMO WERE INCLUDED IN THE BANK STATEMENT: DATE AMOUNT JULY 22 $500.00 JULY 31 24.74

 THREE DEBIT MEMO ACCOMPANIED THE BANK STATEMENT: DATE AMOUNT JULY22 $5.00 JULY3O 50.25 JULY31 12.00 CHECK NO. 875 WAS ISSUED JULY 20 IN THE AMOUNT OF $85 BUT WAS ERRONEOUSLY RECORDED IN THE CASH PAYMENTS JOURNAL AS $58. THE CHECK, IN PAYMENT OF TELEPHONE EXPENSE WAS PAID BY THE BANK AN CORRECTLY LISTED AT $85 IN THE BANK STATEMENT. IN HAMPSONS LEDGER THE CASH ACCOUNT IS OVERSTATED BY $27 BECAUSE OF THIS ERROR (85-58=27)

HAMPSON COMPANY Bank Reconciliation july 31, 2001 Balance per bank statement, july 31,2001........................$5,000.17 ADD: Deposit of july 31,not recorded by bank................. 419.90 $5,411.07

LESS: Outstanding checks:

No.801...........................$100.00 No.888........................... 10.25 717.75 $4,693.32 No.890........................... 402.50 No.891........................... 205.00 ADJUSTED CASH BALANCE ADD: N/R collected by bank......$500.00 Intrest earned during july......... LESS: Collection fee..................$ Service charges........................ 24.74 5.00 12.00 524.74

Balance per depositor records,july31, 2001.........................$4,262.83

NSF CHECKS FOR J.B.................. 50.25