Accounting For Uncollectible Accounts Using The Allowance

Accounting For Uncollectible Accounts Using The Allowance

Accounting for uncollectible accounts involves estimating and recording the expected amount of receivables that may not be collected, thereby accurately presenting the company's financial position. The allowance method, particularly the aging-of-receivables approach, requires analyzing accounts receivable based on how long they have been outstanding and estimating the uncollectible portion accordingly. This method improves the accuracy of financial reporting by matching expenses with revenues in the appropriate period. The recognition of bad debts impacts both the income statement and the balance sheet, and proper journal entries are essential to reflect these adjustments.

This paper discusses the procedures involved in accounting for uncollectible accounts using the allowance method based on aging of receivables. It illustrates the journal entries needed to record transactions for Green Terrace Medical Center (GTMC), including sales, collections, write-offs, and the estimation of bad debts. Additionally, it demonstrates how to prepare the aging schedule, estimate uncollectible amounts, adjust the allowance for bad debts, and report net accounts receivable on the balance sheet as of December 31, 2018.

Paper For Above instruction

Green Terrace Medical Center (GTMC) faced the common challenge of managing accounts receivable that might not be fully collectible. To manage this risk and prepare accurate financial statements, GTMC adopted the allowance method, employing the aging-of-receivables approach to estimate uncollectible accounts. The process entails tracking outstanding receivables, categorizing them by age, estimating uncollectibility percentages, and making necessary journal entries to reflect these estimates. The following sections detail the specific transactions during the last quarter of 2018 and the subsequent adjustments for bad debts.

Step 1: Recording Initial Transactions

Initially, GTMC recorded sales on account totaling $450,000. Although the sales entry is straightforward, it sets the foundation for subsequent collections and write-offs. The journal entry is:

Date: [Date of sale]


Dr. Accounts Receivable  $450,000


Cr. Revenue               $450,000

During the last quarter, collections from customers amounted to $427,100, which reduces accounts receivable. Write-offs due to uncollectibility included accounts from Regan Co., Owen Reis, and Patterson Inc., totaling $2,900. The journal entries for collections and write-offs are:

Date: [Collection date]


Dr. Cash                     $427,100


Cr. Accounts Receivable      $427,100


Date: [Write-off date]


Dr. Allowance for Bad Debts  $2,900


Cr. Accounts Receivable       $2,900

The write-off is made by debiting the Allowance for Bad Debts, which already has a credit balance, and crediting Accounts Receivable to remove the uncollectible amounts.

Step 2: Analyzing Accounts Receivable Using Aging Schedule

At December 31, 2018, GTMC prepared an aging schedule, categorizing receivables by outstanding period and estimating uncollectibility rates:

  • 1-30 days: $104,000 at 0.3% uncollectible
  • 31-60 days: $39,000 at 3% uncollectible
  • 61-90 days: $14,000 at 30% uncollectible
  • Over 90 days: $8,000 at 35% uncollectible

The total accounts receivable sums to $165,000, and the estimated uncollectible amount is calculated by multiplying each category's receivable balance by its respective uncollectibility rate:

- 1-30 days: $104,000 x 0.3% = $312


- 31-60 days: $39,000 x 3% = $1,170


- 61-90 days: $14,000 x 30% = $4,200


- Over 90 days: $8,000 x 35% = $2,800


Total estimated uncollectible = $312 + $1,170 + $4,200 + $2,800 = $8,482

Step 3: Adjusting the Allowance for Bad Debts

The Allowance for Bad Debts account initially had a credit balance of $3,500 (given as a credit balance), but after accounting for the write-offs of $2,900 and the new estimate, the allowance must be adjusted to reflect the ending balance equivalent to the estimated uncollectibles, which is $8,482.

To determine the adjustment needed, calculate the ending balance of the allowance account after postings:

Beginning allowance (credit) balance: $3,500


Less: Write-offs during the period: $2,900


Remaining balance before adjustment: $3,500 - $2,900 = $600


Desired ending balance (estimated uncollectibles): $8,482


Required adjustment to Allowance for Bad Debts: $8,482 - $600 = $7,882

The journal entry to record bad debts expense is:

Dr. Bad Debts Expense             $7,882


Cr. Allowance for Bad Debts        $7,882

This entry increases the allowance to the estimated uncollectible amount, aligning the balance sheet with realistic expectations of receivables' realizability.

Step 4: Reporting on the Balance Sheet

After all adjustments, GTMC reports net accounts receivable, which equals total receivables minus the ending balance of the allowance for bad debts. The balances are as follows:

  • Accounts Receivable: $145,000 (original) + $450,000 (sales) - $427,100 (collections) - $2,900 (write-offs) = $165,000
  • Less: Allowance for Bad Debts: $8,482 (estimated uncollectibles)

Therefore, the net accounts receivable reported in the balance sheet as of December 31, 2018, is:

$165,000 - $8,482 = $156,518

This net amount reflects the cash realization value of receivables, accounting for estimated uncollectible amounts and minimizing overstatement of assets.

Conclusion

Accounting for uncollectible receivables using the allowance method provides a more realistic view of a company's financial health. The aging-of-receivables approach allows for tailored estimates based on the duration receivables remain outstanding. Proper journal entries for sales, collections, write-offs, and adjustments for bad debts ensure accurate financial statements. For GTMC, implementing this approach resulted in a net receivables figure of approximately $156,518 as of December 31, 2018, reflecting prudent financial management and adherence to accounting principles.

References

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