Wednesday, May 23, 2012

Calculate Allowance for Uncollectible Accounts

Accounting Problem and Answer for Allowance for Uncollectible Accounts 

On the date Jan. 1, 2011, a company had a credit balance of $260,000 in its allowance for uncollectible accounts.  Based on its prior sales history from numerous years, 2% of the company's credit sales have generally been uncollectible.

During 2011, the company wrote off $325,000 of uncollectible accounts.  Credit sales for 2011 were $9,000,000.  In its December 31, 2011, balance sheet, what amount should the company report as allowance for uncollectible accounts?

In order to solve this problem, you have a fund for reducing your Accounts Receivable called allowance for uncollectible accounts and it's purpose is to help you reflect your real Accounts Receivable given the fact that some people just don't pay their bills.  

Steps to Accounting Solution:

  1. Start in the year Jan 1st with the balance at $260,000.
  2. They sold 9,000,000 worth of stuff so you add to this number because 2% of those people won't pay their bills to the company
  3. Write off $325,000 of the Accounts Receivable, which reduces the Allowance for Uncollectible's account by $325,000 as well. 

DEBIT: Allowance for uncollectible accounts.........325,000  
CREDIT: Accounts Receivable................................325,000

Answer: 260,000 + 2% of 9,000,000 - 325,000 of writeoff = 115,000

GAAP mandates the Allowance Method of estimating uncollectible accounts receivable. Most companies estimate their uncollectible accounts receivable using one of three approaches:

1. The percent of sales method
2. The percent of receivables method
3. The aging of receivables method

Additional Accounting Examples:
Percent of Accounts Receivable Method for Estimating Bad Debts Expense
Percent of Sales Method for Estimating Bad Debts Expense

1 comment:

Anonymous said...

Would 115,000 be credit or debit? Credit right?

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