Financial Accounting: An Integrated Statements Approach, 2nd Edition

You should note that the allowance account balances (credit balance of $3,250 and

debit balance of $4,100) in the preceding illustrations are beforethe end-of-the-period

adjusting entry. After the end-of-the-period adjusting entry is recorded, Allowance for

Doubtful Accounts should always have a credit balance.

What happens if an account receivable that has been written off against the al-

lowance account is later collected? Like the direct write-off method, the account is re-

instated by an entry that reverses the write-off entry. The cash received in payment is

then recorded as a receipt on account.

To illustrate, assume that Nancy Smith’s account of $5,000 which was written off

on April 2 is later collected on June 10. ExTone Company records the reinstatement

and the collection as follows:

June 10 Accounts Receivable—Nancy Smith 5,000

Allowance for Doubtful Accounts 5,000

10 Cash 5,000

Accounts Receivable—Nancy Smith 5,000

Estimating Uncollectibles

As we indicated earlier in this section, the allowance method estimates bad debt ex-

pense at the end of the period. How is the amount of uncollectible accounts estimated?

The estimate of uncollectibles at the end of a fiscal period is based on past experience

and forecasts of the future. When the general economy is doing well, the estimate of

bad debt expense is normally less than it would be when the economy is doing poorly.

Two methods are commonly used to estimate uncollectible accounts receivable at

the end of the period. The estimate may be based upon (1) a percent of sales or (2) an

analysis of the receivables. We describe and illustrate each method next.

Estimate Based on Percent of Sales. Since accounts receivable are created by credit

sales, bad debt expense can be estimated as a percent of credit sales. To illustrate, as-

sume that on December 31, 2008, the Allowance for Doubtful Accounts for ExTone

Company has a credit balance of $3,250. In addition, ExTone estimates that 1^1 – 2 % of

2008 credit sales will be uncollectible. If credit sales for the year are $3,000,000, the

adjusting entry for uncollectible accounts on December 31 is as follows:

Dec. 31 Bad Debt Expense 45,000

Allowance for Doubtful Accounts 45,000

($3,000,0000.015$45,000)

After the preceding adjusting entry is posted to the ledger, Bad Debt Expense will

have a balance of $45,000, and the Allowance for Doubtful Accounts will have a bal-

ance of $48,250, as shown on page 361.

360 Chapter 8 Receivables

ALLOWANCE FOR DOUBTFUL ACCOUNTS

Jan. 1, 2008 Bal. 40,000

Total accounts

Jan. 21 6,000

written off $44,100

Feb. 2 3,900

Dec. 31, 2008 Unadjusted balance 4,100

If ExTone Company had written off $44,100 in accounts receivable during 2008, the

Allowance for Doubtful Accounts would have a debit balance of $4,100, as shown below.

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