How to Adjust the Allowance for Uncollectible Accounts When Cash Is Received

Account for the customers who will not pay.

Offering credit is usually necessary when operating a business. A disadvantage of offering credit to customers is that some of them will fail to pay. If a business does not report this risk on its books, the books will be inaccurate. For this reason, businesses estimate how many of their customers won't pay and put this amount into an account labeled Allowance for Uncollectible Accounts. Occasionally, a customer will pay on the account after it has been written off, requiring an adjustment to the account. The adjustment is entered by reinstating the account, then recording the payment.

Instructions

Writing Off an Account

1. Understand accounting terminology. Assets, such as cash and supplies, are things the business owns. Accounts Receivable is an asset account for funds owed to the business. Liabilities, such as salaries payable, are things the business owes. A general journal, which has a debit column on the left and a credit column on the right, is a list of all the transactions affecting a business. Entries made in the debit column increase the balance of an asset account, while entries made in the credit column reduce the balance of an asset account.

2. Enter the amount written off in the debit column of the general journal. For example, if the amount written off is $500, enter 500 in the debit column. Write "Allowance for Uncollectible Accounts" on the line under the heading labeled "Accounts."

3. Enter the amount written off in the credit column of the general journal on the next line down. Write "Accounts Receivable" under the heading labeled "Accounts." This entry writes off the account as uncollectible.

Adjusting Account After Write-Off

1. Enter the amount of the payment in the debit column of the general journal. For example, if the amount of the payment is $500, enter 500 in the debit column. Write "Accounts Receivable" on the line under the heading labeled "Accounts.". This entry reinstates the account that was written off.

2. Enter the amount of the payment in the credit column of the general journal on the next line down. For example, if the amount of the payment is $500, enter 500 in the credit column. Write "Allowance for Doubtful Accounts" on the line under the heading labeled "Accounts."

3. Enter the amount of the payment in the debit column of the general journal on the next line down. Write "Cash" on the line under the heading labeled "Accounts." This entry records the payment on the account that was reinstated.

4. Enter the amount of the payment in the credit column of the general journal on the next line down. Write "Allowance for Uncollectible Accounts" on the line under the heading labeled "Accounts."

References

• AccountingCoach: Accounts Receivable and Bad Debts Expense
• University of Massachusetts; Accounting for Uncollectible Accounts Receivable: Part 2; C.P. Carter

Resources

• "College Accounting"; Accounting For Receivables and Uncollectibles; 2008
• University of Idaho: Business Management and Technology Curriculum Guide