[Inter] Allowance for Uncollectible Accounts (Allowance Method)

[Inter] 

Allowance for Uncollectible Accounts 

(Allowance Method)

1. Percentage of Sales Method
   (Income Statement approach)

  Bad Debt Expense =
  Net sales x Percentage estimated as uncollectible 
                      ※ For identifying the applicable percentage is 
                         based on the company's experience
                         depends on the sales method

Ex) Company "A" base estimated uncollectible
     accounts on total credit sales for the period.
     "A" estimates that 5% of its $100,000 credit sales
     will not be collected.
     The credit balance in the allowance
     for uncollectible accounts before adjustment is
     $3,500.

<Journal Entry>   
     (Debit) Bad debt expense   5,000
          (Credit) Allowance for
                     doubtful account   5,000

<Remaining Balance>   
    ⓐ Begin balance in allowance
        for uncollectible accounts                 $3,500
    ⓑ  Additions as a result of
         new credit sales                               5,000
    --------------------------------------------------------------------
    ⓒ End balance (ⓐ+ⓑ) in allowance
        for uncollectible accounts                  $8,500


2. Percentage of A/R at year end method
   (Balance Sheet Approach)


※ When the allowance method of recognizing uncollectible accounts is used, how would the collection of an account previously written off affect accounts receivable and the allowance for uncollectible accounts?

Answer)

A/R   XXX        Allowance for Uncollectible ACC  XXX

To reopen account to balance when written off.
Cash   XXX       A/R   XXX

So, Cash and Allowance are increasing
(No effect on net A/R, net income,
  current assets, working capital)
   

※ The journal entry to record the write-off of an account
Allowance for uncollectible ACC   XXX     A/R   XX
(Allowance and A/R are decreasing
 No effect on net income nor total assets)

3. Aging Receivable Method