Ask Me Help Desk - Uncollectible Accounts

I am needing clarification with this. I know that you estimate what to put in allowance for doubtful accounts (the contra asset account) at the first of the period and that you adjust it as the accounting period goes along (writing off accounts, adjusting accounts receivable and allowances for doubtful accounts). When do you add (or transfer) the balance in allowance for doubtful accounts to the Uncollectible Accounts Expense account?; I am guessing its at the end of the period when you are making your income statement but I'm still confused a little bit on the whole thing. If you could put a whole step by step process for this that would help me a lot (including the journal entries).

Quote:

Originally Posted by Superfly999

I am needing clarification with this. I know that you estimate what to put in allowance for doubtful accounts (the contra asset account) at the first of the period and that you adjust it as the accounting period goes along (writing off accounts, adjusting accounts receivable and allowances for doubtful accounts). When do you add (or transfer) the balance in allowance for doubtful accounts to the Uncollectible Accounts Expense account?; I am guessing its at the end of the period when you are making your income statement but i'm still confused a little bit on the whole thing. If you could put a whole step by step process for this that would help me a lot (including the journal entries).

I do not think that you estimate what to put in the allowance at the beginning of the period because that will make you ultra conservative because you have not yet even known the quality of your sales.

The balance of the allowance at the beginning should be the ending balance last period. After recording write-offs, estimated bad debts along the way, and other adjustments to the allowance for doubtful accounts, you normally have a final adjustment at the end of the year depending on the method you are using: asset or income statement.

In asset, you compute for a % of AR or use the aging method. The resulting amount becomes the required balance of allowance at the end of the period. You adjust by debiting or crediting Bad Debts Expense and Allowance for Doubtful accounts to meet the required balance.

In income statement, you use a % of sales/net sales in computing for Bad Debts. Whatever you get from that will be dr. Bad Debts/cr. Allowance, regardless of whatever balance they have before adjustments.

Hope these help you.

Hmmm, I only got part of what you were saying. If you could show me an example with made up journal entries it might help me more though. I think I have the concept of this down for the most part.

Example:
Beginning balance of Allowance 1000
Accounts Written Off (200)
Recovery of previously written off accounts 300
Ending balance of Allowance 1,100

Aging of AR/% of AR is 1,200
1,200 is the required balance for Allowance, so an adjustment has to be made:

dr. Bad Debts Expense 100
cr. Allowance for DA 100

If the Aging or % of AR is 1000, adjustment will be to reduce allowance:

dr. Allowance for DA 100
cr. Bad Debts Expense 100

If, let's say, recovery of previously written off accounts is 900, the ending balance would be a debit balance of 100. Adjustment would be: (1000-200+900)=-100 ending balance of allowance; required balance of 1200 less debit balance of (-100)=1,300

dr. Bad Debts Expense 1300
cr. Allowance for DA 1300

The above examples use the balance sheet approach. If the company is using the income statement approach or the % of sales/net sales:

If doubtful accounts are estimated to be 1% of net sales and net sales is 5000, adjustment would be made as follows:

dr. Doubtful Accounts 50
cr. Allowance for DA 50

Ending balance of Allowance for DA would be 1100+50=1150. The ending balance would not be considered unlike the Balance sheet approach.

I have a question in your above example. I think I have it all down now thanks to you :) <3

Quote:

Originally Posted by goldenbutterfly

If, let's say, recovery of previously written off accounts is 900, the ending balance would be a debit balance of 100. Adjustment would be: (1000-200+900)=-100 ending balance of allowance; required balance of 1200 less debit balance of (-100)=1,300

If the recovery of previously written off accounts is 900 wouldn't that be a cr of 900 to allowances of doubtful accounts? Wouldn't it be adjusted like this? (1000+900-200)=cr. 1700, so then after that you need to adjust it like this?
current bal. for allowances = cr 1700
adjustment for the required ending balance = cr. 500 to bad debts expense and dr. 500 to allowances?

Quote:

Originally Posted by goldenbutterfly

Beginning balance of Allowance 1000
Accounts Written Off (200)
Recovery of previously written off accounts 300
Ending balance of Allowance 1,100

which Begging balance = cr. 1000
accounts wrriten off = dr. 200
recovery of written off = cr. 300
ending balance = cr. 1,100

that's why I came to the earlier conclusion and it threw me off a little bit.

One last question for you. ( I know your like when will this kid understand lol )

The book I'm reading from uses the percentage of net credit sales method. From your example I got that you add whatever % you estimated off net sales. You cr. To the ending balance of Allowances for DA and dr. the doubtful accounts expense with your % of net sales? If I have been correct so far I understand it all now. Again, thank you so much goldenbutterfly, that was the only problem I have had so far with what I have learned.

*EDIT* I found one more problem when I got more indepth with this. In my book it says "The balance of Allowance for Doubtful Accounts is reduced throughout the year as customer accounts are written off. notice that Allowance for Doubtful aAccounts already has a credit balance of $100 in the Trail Balance section of the worksheet. When the estimate of uncollectible accounts expense is based on sales, any remaining balance from previous periods is not considered when recording the adjustment.". I understand this but what I don't understand is what it did next.

In the book it said that the estimated % of net credit sales uncollectible equals to $750; which means cr. 750 to allowances of doubtful accounts and dr. 750 to bad debt expense. Right after this it shows in the worksheet that the balance of allowances for doubtful accounts is cr. 850 which contradicted itself because the previous period bal. of allowances was 100 adding to the new one from % of net sales to equal the cr. 850 which is stated that the pervioud balance is not considered and/or recorded with the new one (enless I have mistaken something). But if this is the case (where you discard the previous balance of allowances) where does that $100 end up? Isn't all your funds suppose to be accounted for and know where they go? Because that was $100 in the allowances fund that was left over from last period and doesn't just vanish, does it end up as revenue?

Lol I can see I work best with the direct write-off method xD

Nm I found out how to do all of this :) ACCOUNTING ASSESSMENT EXAM REVIEW helped me a lot along with golden