[animalwithin]

I struggle with receivables big time and I feel as if I’m making them much harder than they really are.

Here is one I just don’t get:

For the current year ended December 31, Beal Co. estimated its allowance for uncollectible accounts using the year-end aging of accounts receivable. The following data are available:

Allowance for uncollectible accounts, 1/1 $42,000
Provision for uncollectible accounts (2% on credit sales of $2,000,000) 40,000
Uncollectible accounts written-off, 11/30 46,000
Estimated uncollectible accounts per aging, 12/31 52,000

After the year-end adjustment, the uncollectible accounts expense for the current year should be: $56,000

Here is the answer explanation:

Since Beal uses the aging method, the credit sales information is irrelevant. The balance in the allowance account was a debit of $4,000 (42,000 – 46,000) prior to the year-end adjustment. Given that the year-end allowance balance should be $52,000, bad debt expense would be debited for $56,000, and the allowance account would be credited for $56,000.

MY QUESTIONS:

-Why is the beginning balance of $42,000 a credit and not a debit?
-How does crediting the allowance account or $56,000 get us to $52,000
-How do we know when we use bad debt expense vs. allowance for uncollectible accts?

[water]

Allowance for Uncollectibles (Now known as allowance for credit losses) is a conta-A/R account, meaning it reduces the balance of A/R (like Accumulated Depr is contra to Fixed Assets). Therefore, a positive balance in Allowance for Collectibles is a credit.

The “Provision for Uncollectible Accounts” amount is a red herring, because you only adjust the balance in Allowance for Uncollectibles at year-end. (edit: looking back it explains that this does not utilize the aging method.)

Writing off accounts uses this JE:
Allowance for CL 46000 (<- debit)
A/R 46000 (<- credit)
Therefore it would decrease the balance to (4000) ie, a debit balance of 4,000.

using the estimate at 12/31, you must adjust the uncollectibles account to have that balance – a credit balance of 52k. therefore, a credit of 56k is necessary:

Credit Loss expense 56000 (<- debit)
Allowance for Credit Loss 56000 (<- credit)

Credit loss expense or “bad debt expense” (old terminology) is only adjusted in the same JE as allowance for uncollectibles.

REG - 91 (May 18 2020)

FAR - 89 (Aug 24 2020)

BEC - 95 (Sept 28 2020)

AUD - 90 (Nov 12 2020)

[animalwithin]

Water, thank you for the explanation.

So, can we always assume that if we have an OPENING BALANCE in Allowance of Uncollectible Accts it's a CREDIT (unless otherwise stated) and if we WRITE OFF an account as uncollectible, it's a DEBIT to Allowance for Uncollectible Accts?

What threw me off on this problem was the debits/credits. I put the opening balance in the debit + another debit for the write off, as well as the ending balance as a debit.

[AGI]

Positive balance in Allowance of Uncollectible Account is always a credit. A write off — which is bad debt EXPENSE is a debit. Allowance of Uncollectible Account is technically still an ASSET, so it's credit. You are just writing the asset-cash in a different way (just in case not collected).

Allowance +10
AR -10
Note: Expected not collectable (meaning selling it to collection agency)

Bad Debt Expense +5
Cash +5
Allowance – 10
Note: Sold the $10 allowance to collection agency for $5.
PS. Good luck for collection agency to collect the $10 and make a profit.

Correct me if I am wrong. Haven't do bookkeeping for so long.

NY - CPA

New York - NYC
Passed CPA Exam (11/2014)
In search for a position in NYC that will fulfills the license requirement.

[Author]

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