Allowance for uncollectible accounts Flashcards
What should we not count in the assets of the company?
The receivables not expected to be collected from customers should not be counted in assets of the company.
Bad Debt expenses. (First year)
When it is just the first year, and we want to record the allowance of uncollectible accounts, we
DR Bad Debt Expenses
CR Allowance for Uncollectible Accounts
This lowers the net income. (RE decreases and Assets Decreases)
What account is allowance for uncollectible accounts?
It is a contra-asset account. This reduces accounts receivable indirectly.
This represents a reduction in the balance of accounts receivable.
The difference between the total accounts receivable and the allowance for uncollectible accounts = net account receivable.
What balance does allowance of uncollectible accounts have?
It has a normal credit balance.
What is bad debt expense?
It is the offsetting debit in the entry to establish the allowance account.
It represents the cost of estimated future bad debts that is reported as an expense in the income statement, along with other expenses.
What is bad debt expense?
It is the offsetting debit in the entry to establish the allowance account.
It represents the cost of estimated future bad debts that is reported as an expense in the income statement, along with other expenses.
Writing off accounts receivable
It is now confirmed that the customer cannot pay the money.
- Previously, we expected a sum of money that we will never return.
- Now we know for sure that a sum of money will never be returned.
- We thus write off the accounts receivable.
DR Allowance of uncollectible accounts
CR Accounts Receivable
- Overall, the write-off of the account receivable has no effect on total amounts reported in the balance sheet or in the income statement.
- There is no decrease in total assets and no decrease in the net income with the write off.
- This is because we have already recorded the negative effects of the bad news.
Collecting on accounts receivable previously written off
Previously, the company already expects that it will not receive any more money from the customer. However, suddenly the customer can pay back a portion of the money. As such, the company needs to reverse a portion of the previous entry and record the collection of the account receivable.
DR Accounts Receivable
CR Allowance of Account receivable
DR Cash
CR Accounts Receivable.
Again, there is no net effect of on total assets and no effect on net income.
Adjusting the allowance in subsequent years
After estimating what is the amount uncollected, then Allowance for Accounts Receivable needs to have an ending balance of that figure.
We will need to know what is the current balance for Allowance of AR and determine the adjustment needed to achieve the balance of that figure in paragraph 1.
