Instructions: Fill in the blanks _____.

DEMONSTRATION PROBLEM Estimating Uncollectible Accounts Based on Aging of Receivables

When accountants estimate uncollectible accounts based on receivables, they determine what the balance of the allowance for doubtful accounts should be. Assume that an accountant determines that $2,000 of the current accounts receivable (aging receivables) will probably not be collected. Also assume that the Allowance for Doubtful Accounts currently shows a $200 credit balance.

Allowance for Doubtful Accounts

200 Current Balance

_____ Amount that must be added to the account to get the correct balance

2,000 Amount that should be in the account based on the estimate of bad debts

The adjusting entry to record uncollectible accounts is:

____________________ _______

_____________________ ______

Assume that the accountant determines that $2,000 of the current accounts receivable will probably not be collected and that the Allowance for Doubtful Accounts currently shows a $200 debit balance.

Allowance for Doubtful Accounts

Current Balance 200

______ Amount that must be added to the account to get the correct balance

2,000 Amount that should be in the account based on the estimate of bad debts

Now, the adjusting entry to record uncollectible accounts is:

____________________ _______

_____________________ ______

Why the Allowance for Doubtful Accounts would have a debit balance. The following T-account explaining the entries which effect the Allowance will show that a debit balance occurs when the amount of bad debts are underestimated and there are more actual write-offs than expected. In the above example, bad debts from the previous period were underestimated by $200. Since the allowance came up short, the entry to record bad debts in the current period is $2,200the current expense of $2,000 plus an extra $200 to catch-up for the amount underestimated last accounting period.

Allowance for Doubtful Accounts

Actual Write-Off Adjusting Entry to

of Uncollectible Record Estimate of

Accounts Uncollectible Accounts

A credit balance occurs when the amount of bad debts are overestimated. The account would have a zero balance if a business perfectly estimated the amount of bad debts.

Compared to the allowance method, the journal entries for the direct write-off method of recording uncollectible accounts are very straight forward. Use the lecture aids that follow to quickly review the basics of the direct write-off method, and ask your students to practice the journal entries using the group learning activity.

Direct Write-Off of Uncollectible Receivables

Under the direct write-off method, the following occur:

1. Uncollectible Accounts Expense is recorded when an account is written off.

NOTE: No attempt is made to estimate the amount of uncollectible accounts in advance.

An Allowance for Uncollectible Accounts is not established.

2. If an account that has been written off is collected, the account is reinstated before recording the payment received.

The direct write-off method does not require an adjusting entry at the end of the accounting period.

Remember to emphasize that the direct write-off method is theoretically unacceptable, because the expense resulting from uncollectible accounts may be recognized in a different accounting period from the sales revenue from those accounts. Expenses are not matched against revenues. Therefore, the direct write-off method should be used only when the following two conditions exist:

It is impossible to estimate uncollectible accounts with any reasonable accuracy.

The amount of uncollectible accounts is immaterial.

How do you record the write off when using The Direct Write-off Method:

____________________ _______

_____________________ ______

When do you record the write off when using the Direct Write-off Method:

At the end of every year

At the beginning of the year

When is determined by the company that the account is uncollectable.

If using the DirectWrite off method the balance sheet statement and Income Statement are impacted when writing off an account: ______ Yes or ___NO