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Precision Parts sells new auto parts. Although a majority of its sales are for cash, it makes a significant amount of credit sales. During 2016, its first year of operations, Precision experienced the following: Sales on account $160,000 Cash sales 340,000 Collection of accounts receivables 147,500 Uncollectible accounts charged off during the year 700 Assuming that Precision uses the allowance method of accounting for uncollectible accounts and estimates that 1 percent of its sales on account will not be collected, what is the ending balance of Allowance for Doubtful Accounts at December 31, 2016, after all entries and adjusting entries are posted?

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mltn1980

Answer:

What is the ending balance of Allowance for Doubtful Accounts at December 31, 2016,

Cr Allowance for Uncollectible Accounts $ 1,600

Explanation:

  • Initial Balance  

Dr Accounts Receivable  $ 160,000

  • Collection of accounts receivables 147,500  

Dr CASH $ 147,500

Cr Accounts Receivable  $ 147,500

  • Uncollectible accounts charged off during the year 700  

Dr Allowance for Uncollectible Accounts $ 700

Cr Accounts Receivable  $ 700

  • 1 percent of its sales on account will not be collected  

Dr Bad Debt Expense $ 2,300

Cr Allowance for Uncollectible Accounts $ 2,300

  • FINAL Balance  

Dr Accounts Receivable  $ 11,800

Cr Allowance for Uncollectible Accounts $ 1,600

If the company applies the allowance method, it means that the account Allowance for Uncollectible Accounts must show as balance the % of SALES 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 value.  

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.