Short-term liquid assets that arise from sales on credit at the wholesale or retail level.
Accounts receivable are amounts still to be collected from credit sales to customers. Because credit is offered to increase sales, uncollectible accounts associated with credit sales should be charged as expenses in the period in which the sales are made. However, because of the time lag between the sales and the accounts are judged uncollectible, the accountant must estimate the amount of bad debts in any given period.
Uncollectible accounts expense is estimated by either the percentage of net sales method or the accounts receivable aging method. When the first method is used, bad debts are judged to be a certain percentage of sales during the period. When the second method is used, certain percentages are applied to groups of accounts receivable that have been arranged by due dates.
Allowance for Uncollectible Accounts is a contra-asset account to Accounts Receivable. The estimate of uncollectible accounts is debited to Uncollectible Accounts Expense and credited to the allowance account. When an individual account is determined to be uncollectible, it is removed from Accounts Receivable by debiting the allowance account and crediting Accounts Receivable. If the written-off account should later be collected, the earlier entry should be reversed and the collection recorded in the normal way.
