Question

explain how a company (a) ages its accounts receivable and (b) uses the information in its year end adjusting entry to record uncollectible accounts expense? Explain in detail.

Answer 1

• Answer (a)

--The company ages its account receivables into various categories.

--There can be many account receivables. Some might be very old, some can be recent. Accordingly, the company CAN categorise them as “less than 60 days old”, “60 – 120 days old” and “more than 120 days old”, or in any manner.

--Then a certain % is ascertained and estimated that this much amount will not be collected or is uncollectible from this particular category of account receivables.

--After that determination of %, final uncollectible amount is calculated.

--One example of Account receivables again is provided for assistance:

Due since	Account receivables	% Uncollectible	Amount of Receivable estimated to be uncollectible
Not yet due	$                                 275,000.00	4.0%	$                                     11,000.00
Upto 120 days	$                                   70,000.00	10.0%	$                                        7,000.00
More than 120 days	$                                   32,000.00	25.0%	$                                        8,000.00
Total	$                                 377,000.00		$                                     26,000.00

• Answer (B)

--This above information is used to record adjusting entry for Uncollectible accounts expense by comparing the balance already appearing in the Allowance for Uncollectible account (unadjusted balance).

--The amount of Uncollectible expense estimated should be equal to the adjusted balance of Allowance for Uncollectible account. Hence, unadjusted balance and amount determined to be uncollectible are compared and any difference is recorded as Bad Debt Expense (debited to) and credited to Allowance Account.

--Taking the above example data, lets say that Unadjusted balance in Allowance for Uncollectible account was $ 10,000 [credit]. Adjusted balance required = $ 26,000 [credit: computed in ‘A’]. This means adjustment is required for $ 16,000 [26000 -10000]. This is how Information in Aging schedule of accounts receivable is used to determine and record Uncollectible expense. The adjusting entry will be :

General Journal	Debit	Credit
Uncollectible Expenses	$                                   16,000.00
Allwoance for Uncollectible expenses		$                  16,000.00