Question

Pincus Associates uses the allowance method to account for bad debts. During 2021, its first year of operations, Pincus provided a total of $267,000 of services on account. In 2021, the company wrote off uncollectible accounts of $10,700. By the end of 2021, cash collections on accounts receivable totaled $224,700. Pincus estimates that 15% of the accounts receivable balance at 12/31/2021 will prove uncollectible

Answer 1

Answer:

• Assuming 15% of accounts receivable, the journal entry:  

Dr Bad Debt Expense $ 15,440  

Cr Allowance for Uncollectible Accounts  $ 15,440

Explanation:

• Pincus estimates that 15% of the accounts receivable  

Initial Balance  

Dr Accounts Receivable   $ 267,000

• The company wrote off uncollectible accounts    

Dr Allowance for Uncollectible Accounts $ 10,700  

Cr Accounts Receivable   $ 10,700

• Cash collections on accounts receivable  

Dr Cash $ 224,700  

Cr Accounts Receivable   $ 224,700

• Adjusted Balance

Dr Accounts Receivable   $ 31.600

• Assuming 15% of accounts receivable, the journal entry:  

Dr Bad Debt Expense $ 15.440  

Cr Allowance for Uncollectible Accounts  $ 15.440

• FINAL Balance  

Dr Accounts Receivable  $ 31.600  

Cr Allowance for Uncollectible Accounts  $ 4.740

If the company applies the allowance method, it means that the account Allowance for Uncollectible Accounts must show as balance the 15% of accounts receivables as CREDIT.

Because the company has a debit balance in that account it's necessary to register an entry that compensate the DEBIT value and reflect A CREDIT estimated as 15% of account receivable.

Bad accounts are those credits granted by the company and there is no possibility of being charged.

When customers buy products on credits but the company cannot collect the debt, then it's necessary  to cancel the unpaid invoice as uncollectible.

One way is to directly cancel bad debts at the time it was decided that the credit is bad, the total amount reported as bad debt expenses negatively affect the income statement and the accounts receivable are reduced by the same amount, less assets

The other way is to determine a percentage of the total amount of accounts receivable as bad debts, there are many ways to analyze accounts receivable and calculate the value of bad debts.

When the company has the percentage of uncollectible accounts, the required journal entry is Bad Expenses (debit) with Reserve for Bad Accounts (credit)

At the time of cancellation, since the expenses were recognized before, we only use the Allowance for Uncollectible Accounts (Debit)  with accounts receivable (credit), with this we are recognizing the bad credit of the company.