As a result of the analysis it can be seen that a

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Unformatted text preview: sult of the analysis, it can be seen that a target balance of $25,500 is needed; necessitating the following adjusting entry: 12-31-X5 *** Uncollectible Accounts Expense 15,500 Allow. for Uncollectible Accounts 15,500 To adjust the allowance account from a $10,000 balance to the target balance of $25,500 ($25,500 - $10,000) 360° thinking You should carefully note two important points: (1) with balance sheet approaches, the amount of the entry is based upon the needed change in the account (i.e., to go from an existing balance to the balance sheet target amount), and (2) the debit is to an expense account, reflecting the added cost associated with the additional amount of anticipated bad debts. Please click the advert . 360° thinking . 360° thinking . Discover the truth at © Deloitte & Touche LLP and affiliated entities. Discover the truth at © Deloitte & Touche LLP and affiliated entities. Download free ebooks at 13 Discover the truth at © Deloitte & Touche LLP and affiliated entities. © Deloitte & Touche LLP and affiliated entities. D Alternative Approaches for Uncollectibles Current Assets: Part II Rather than implement a balance sheet approach as above, some companies may follow a simpler income statement approach. With this equally acceptable allowance technique, an estimated percentage of sales (or credit sales) is simply debited to Uncollectible Accounts Expense and credited to the Allowance for Uncollectible Accounts each period. Importantly, this technique merely adds the estimated amount to the Allowance account. To illustrate, assume that Pick Company had sales during the year of $2,500,000, and it records estimated uncollectible accounts at a rate of 3% of total sales. Therefore, the appropriate entry to record bad debts cost is as follows: 12-31-X5 *** Uncollectible Accounts Expense Allow. for Uncollectible Accounts 75,000 75,000 To add 3% of sales to the allowance account ($2,500,000 X 3% = $75,000) This entry would be the same even if there was already a balance in the allowance account. In other words, the income statement approach adds the calculated increment to the allowance, no matter how much may already be in the account from prior periods. 3.2 Writing off Uncollectible Accounts Now, we have seen how to record uncollectible accounts expense, and establish the related allowance. But, how do we write off an individual account that is determined to be uncollectible? This part is easy. The following entry would be needed to write off a specific account that is finally deemed uncollectible: Download free ebooks at 14 Alternative Approaches for Uncollectibles Current Assets: Part II *** 3-15-X3 Allow. for Uncollectible Accounts 5,000 Accounts Receivable 5,000 To record the write-off of an uncollectible account from Aziz Notice that the entry reduces both the allowance account and the related receivable, and has no impact on the income statement. Further, consider t...
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This note was uploaded on 06/07/2013 for the course BA 201 taught by Professor Cuongvu during the Fall '13 term at RMIT Vietnam.

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