uncollectable account expense

Entries of Seller and Purchaser

Seller Purchaser

Particulars Debit

Credit

Particulars Debit

Credit

Cash Sale(cash sale)

10001000

Purchase Cash(purchasing on cash)

1000 1000

Trade receivable sale(credit sale)

10001000

Purchase Trade payable (purchase on credit)

10001000

Sale return & allowances Trade receivable

(sale return)

10001000

Trade payable Purchase return & allowances (purchase return)

10001000

Trade receivable Sale(credit sale to KLM)

20002000

Purchases Trade payable(purchase from KLM)

20002000

CashSale return & allowances Trade Receivable(on-settlement of defective

1400600

2000

Trade payable Purchase return & allow Cash

(settlement of defective goods )

20006001400

1

goods &

Note: Sale return and allowance account is revenue account.

Note: Purchase return and allowance expense A/C is expense contra account.

Trade receivableAllowance & sale discount Sale

40001000

5000

Purchase Allowance & sale discount Trade receivable

50001000

4000

CashSale discount & Allowance Trade receivableCredit term 2/10 , N/30Sale made on 01-03-2001Payment received 11-03-2001

98020

1000

Trade payable Purchase discount & allow CashCredit term 2/10 , N/30Sale made on 01-03-2001Payment received 11-03-2001

100020980

Note: 2/10-N/30 credit-term, 2% interest on every 20 days18%2x18=36=36%

Example:

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Present entries in general journal form for the following related transactions of Ramzan Decorators, recording merchandise purchases returns and allowances in the purchases account.

a) Purchases PRs 800 of fabrics from Pak Mills on credit, terms 2/10-N/30.

b) Paid the amount owed on the invoice within the discount period.

c) Discovered that many of the fabrics were not colour fast and returned items with an invoice price of PRs 450, receiving credit

d) Purchased PRs 350 of fabrics from Pak Mills on credit, terms 2/10-N/30.

e) Received a cheque for the balance owed from the return in (c), after deducting for the purchase in (d).

Solution:

Particulars Debit CreditPurchase Trade payable(Purchase fabrics on credit-terms 2/10-N/30)

800 800

Trade payable Purchase return & discount Cash(Paid payment in discount period)

80016784

Trade payable 441

3

Purchase discount & allowances

09450

Purchases Trade payable Purchase discount & allowance( Purchase fabrics on credit term 2/10-N/30)

35034307

Cash Trade payable

9898

Trade Payable Account

80044198

800343

1143 1143

Uncollectible account expense

Definition:

When a business or company does not receive payment for goods or services, the transaction must be recorded as an expense for unpaid balance.

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Accounts receivable that cannot be collected are called Uncollectible Accounts.

The amount of accounts receivable not collected is recorded as an expense in the Uncollectible Accounts Expense

Uncollectible Account Expense, also known as a bad-debt expense

At the end of the fiscal year, a business does not know which customer accounts will become uncollectible, so a business can calculate an estimate amount of uncollectible accounts expense.

Before an account is classified as uncollectible, it usually becomes a "doubtful" account. Companies and banks keep a cash reserve for these accounts, which is a contra account to the loan or receivable account. Once an account is deemed uncollectible, it must be written off.

Estimating uncollectible accounts expense does two things:

Reports a balance sheet amount for Accounts Receivable that reflects the amount the business expects to collect in the future.

Recognizes the expense of uncollectible accounts in the same period in which the related revenue is recorded.

We record uncollectible accounts with two methods

Direct method & Direct write off method Provision method

Direct Method:

When a business is unable to collect payment on goods and services that were sold on credit to its customers, it "writes off," or recognizes this loss on its books. The direct write-off of Uncollectible expense or bad debt is a method commonly used by small businesses and companies that are not required to use

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generally accepted accounting principles, or GAAP, to maintain their books.

Direct write-off method is one of the two most common accounting techniques of debts treatment. In the direct write-off method, uncollectible accounts receivable are directly written off against income at the time when they are actually determined as bad debts or Uncollectible expense. When debt is determined as uncollectible, a journal entry is passed in which bad debts expense account or Uncollectible account expense account is debited and accounts receivable account is credited as shown below.

Direct write- off method

does not use

Any allowance or reserve account.

Although the direct write-off method is simple, it has a major drawback. Often it violates the matching principle of accounting because it recognizes bad debt expense which is partly related to previous accounting period. For example if sales are made at the end of accounting year 20X1, bad debts will be realized in the beginning months of accounting year 20X2. Thus the use of direct write-off method would cause deduction of expenses of previous period against revenue of current period which is contrary to the matching principle of accounting.

Since this method is not according to GAAP, it not advised to use direct write-off method. Instead, the allowance method of bad debts treatment is preferred.

Example:

Company A has attempted to collect $6,350 from Company XYZ for several months. Company A's collection department has been informed that Company XYZ has gone out of business, and they have instructed the process owners to write off the amount owed.

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——

Accounts Receivable

——

For income tax purposes, the journal entry to account for this write-off would be:

Examples:

07-02-2014

Using direct write off method:

10-07-2014

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Date AccountDeb

itCredit

3/31/20XX

Un collectible account expense

$6,350

Accounts receivable: company XYZ

$6,350

Write off of Company XYZ

Trade receivable

Sale

(sale on credit)

1000

1000

Uncollectible account expense account

Trade receivable

(write off)

1000

1000

Note: Uncollectible account expense shows in income statement as a marketing expense.

Provision or Allowance method:

The provision method is one of the two common techniques of accounting for bad debts, the other being the direct write-off method. Provision method is a better alternative to the direct write-off method because it is according to the matching principle of accounting. In provision method, the doubtful debts are estimated and Uncollectible account expense is recognized before the debts actually become uncollectible.

Uncollectible expense is recognized early because bad debts are probable and they can be estimated to a fairly accurate extent therefore they fulfill the criteria required for recognition of contingent losses and it is necessary to recognize Uncollectible account expense.

Recognition Entry

The first step in the provision method is to pass an adjusting entry at the end of an accounting period to recognize estimated bad debts expense. Unlike direct write-off method, we do not credit accounts receivable at this stage because it is actually a control account of many individual debtor accounts and we do not yet not know which particular debtor will make a default. We only know the estimated amount of receivables which are likely to end up uncollected. Therefore a provision account called provision for doubtful accounts is credited in the adjusting entry. Thus:

The Uncollectible expense account, just like any other expense account, is closed to income summary account of the period. The allowance for doubtful debts is contra-asset account. It is presented on balance sheet by subtracting it from accounts receivable as shown below:7

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600

Provision for Doubtful Accounts

600

Trade Receivable$15,000

Less: Provision for Doubtful Accounts

− 600

Accounts Receivable, net

$14,400

Write-off Entry

In the next period, when a debt is actually determined as uncollectible, the following journal entry is passed to write it off.

Recovered Bad Debts

When any bad debt is recovered, two journal entries are passed. The first one reverses the write-off entry and the second one is a routine journal entry to record collection. Thus:

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Provision for Doubtful Debts 70Trade Receivable 70

Trade Receivable 70Provision for Doubtful Debts

70

Cash 70Trade Receivable 70

Examples:

1:

07-12-2014

Adjusting entry

In balance sheet:

Trade receivable 100000

Less: Provision for doubtful account 40000

Balance show’s in balance Sheet 96000

In income statement:

Balance show’s as Uncollectible account expense 40,000

2:

31-12-2001


Less: Doubtful debt 5000 95000

31-12-2001

Closing entry:

10

Trade receivable1000

00

Sale1000

00


40000

Provision for doubtful account

40000


5000


5000

2002:

07-03-2002

Note: In provision method we can’t touch uncollectible account expense throughout the year.

10-07-2002

31-12-2002


Less: Provision for doubtful debt 6000 64000




11

Income summary account 5000Uncollectible account expense

5000


1000



4500



6500

Provision for doubtful debt

6500

5000 B

5000

5000 (balance of 2001)

5000

1000

4500

6000

5000 B

6500

11500 11500

6000 B

5000 5000

5000 5000

3:

7-02-2003

10-09-2003

07-11-2003

31-12-2003


Provision for doubtful debt 10000 80000 (Assume)

31-12-2003

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6500 6500

6500 6500

Provision for doubtful debt 500Trade receivable 500



5000 B

5000

5000 (balance of 2001)

5000

1000

4500

6000

5000 B

6500

11500 11500

6000 B

500 8000

1500

2000

10000

14000 14000

B 10000


8000


8000

On receiving cash from customer treated as defaulter

In provision method:

06-07-2003

In direct write off method:

06-07-2003

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Trade receivable 5000Provision for doubtful account

5000

Cash 5000Trade receivable 5000

Trade receivable 5000Uncollectible account expense

5000

cash 5000Trade receivable 5000

uncollectable account expense

Documents