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  • Mar 19, 2008, 07:44 PM
    rochesteraccounting
    Computing the ending balance in the allowance for uncollectable accounts?
    I am looking for help with the following questions, I have myself very confused with the credits/debits, can someone help with these study questions and explain how the answer is arrived at:confused: :confused: Would the answer for a) be $2,320?

    Compute the ending balance in the allowance for uncollectible accounts after the adjusting entries have been prepared and posted for the following independent situations:

    a) Credit balance in allowance for uncollectible accounts of $500 before adjustment. Net credit sales for the current year are $282,000 and 1% is considered uncollectible.

    b) Debit balance in allowance for uncollectible accounts of $700 before adjustment. Net credit sales for the current year are $326,000 and 1.25% is considered uncollectible.

    c) Credit balance in allowance for uncollectible accounts of $500 before adjustment. An aging schedule indicates $3100 of accounts receivables are uncollectible.

    d) Debit balance in allowance for uncollectible accounts of $700 before adjustment. An aging schedule indicates $2660 of accounts receivables are uncollectible.
  • Mar 20, 2008, 10:45 PM
    morgaine300
    Looks like you've subtracted when you should have added. The Allowance for Doubtful Accounts is a contra asset, meaning it's a credit account. It offsets the balance in the Accounts Receivable to get what we call the net receivable value. The receivables aren't worth the full amount if the company thinks it won't collect them all, so we wouldn't want that full amount reflected on the Balance Sheet as that worth. So we reduce by the estimated uncollectible amount to get what we think the actual collectible value is. Since receivables is a debit, that offset account is a credit.

    From what I can tell, you figured out the correct amount -- the $2820. I'm not sure what happened after that. You either thought you should debit the account, meaning a $500 credit would be a subtraction. Or you're getting it mixed up with the analysis of receivable method.

    The entry itself is always a debit to the bad debt expense account and a credit to the allowance account. But this is an estimated amount as we don't know who won't pay. (If we knew, why would we extend them credit?) There are two methods to use to estimate the amount to put in this entry and you have to keep them straight.

    The percent of sales method is the easier of the two. You simply figure the percent of sales they give you, which I believe you did correctly. And that number is the one which goes into your entry. Plain and simple. Then, just like any other account, once you post that entry, you'll have to balance it. In this case, there was a $500 credit balance and posting a $2820 credit entry to the account gets us to a $3320 balance. (I wish I could do a t account on this thing. Some day I'll figure out how.)

    The analysis of receivable is the more confusing method. Your problem is referring to that is the "aging schedule." It's the one that uses the receivables balances rather than sales, regardless of how they state it. For that method, the amount they are giving you is the amount they want in the account after the entry is made. For instance, if it gives you $10,000, that means they want a $10,000 credit balance in the allowance account. If there's a $200 credit balance already in there, then you need to credit $9800 to get to the $10,000 balance needed. So for the entry you use $9800. You can't use the $10,000 because you can't ever journalize a balance.

    One thing to watch out for: since this allowance is just an estimate, we could end up writing off more than we estimated, which would put the account into a negative balance by year-end. So it actually can have a debit balance. Keep in mind that is negative. But the entry is still a credit (which adds to the account) and the balance must be a credit.

    See if you can figure these out with that information. You're welcome to post your answers to be checked. (Including your work is useful.)

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