Uncollectible receivables are amounts customers won’t pay, requiring adjustment to reflect net realizable value. Two methods:
Estimates uncollectibles in the sales period (matching principle). For World Famous Toy Co.: Jan. 31 estimate = $10,000 (Uncollectible Accounts Expense debit, Allowance for Doubtful Accounts credit); Feb. write-off of $4,000 from Discount Stores (Allowance debit, Accounts Receivable credit, net value unchanged at $236,000); Feb. 28 adjustment to $11,000 adds $5,000 (Expense debit, Allowance credit). Uses aging (balance sheet approach) or sales percentage (income statement approach).
Records loss only when uncollectible (e.g., $4,000 write-off: Uncollectible Accounts Expense debit, Accounts Receivable credit). No allowance; violates matching as expense lags sales. Used for small firms or tax purposes.
Allowance method is GAAP-preferred, maintaining a contra-asset (Allowance) to offset receivables, adjusting monthly (e.g., Valley Ranch Supply’s aging schedule), ensuring accurate income and asset reporting.