1. 1
Entries of Seller and Purchaser
Seller
Purchaser
Particulars Debit Credit Particulars Debit Credit
Cash
Sale
(cash sale)
1000
1000
Purchase
Cash
(purchasing on
cash)
1000 1000
Trade
receivable
sale
(credit sale)
1000
1000
Purchase
Trade
payable
(purchase on
credit)
1000
1000
Sale return &
allowances
Trade
receivable
(sale return)
1000
1000
Trade payable
Purchase
return &
allowances
(purchase
return)
1000
1000
Trade
receivable
2000
2000
Purchases
Trade
2000
2000

2. 2
Sale
(credit sale to
KLM)
payable
(purchase from
KLM)
Cash
Sale return &
allowances
Trade
Receivable
(on-settlement
of defective
goods &
Note: Sale
return and
allowance
account is
revenue
account.
1400
600
2000
Trade payable
Purchase
return & allow
Cash
(settlement of
defective goods
)
Note: Purchase
return and
allowance
expense A/C is
expense contra
account.
2000
600
1400
Trade
receivable
Allowance &
sale discount
Sale
4000
1000
5000
Purchase
Allowance
& sale
discount
Trade
receivable
5000
1000
4000

3. 3
Cash
Sale discount &
Allowance
Trade
receivable
Credit term
2/10 , N/30
Sale made on
01-03-2001
Payment
received 11-03-
2001
980
20
1000
Trade payable
Purchase
discount &
allow
Cash
Credit term
2/10 , N/30
Sale made on
01-03-2001
Payment
received 11-03-
2001
1000
20
980
Note:
2/10-N/30 credit-term,
2% interest on every 20 days
18%
2x18=36=36%
Example:

4. 4
Present entries in general journal form for the following related
transactions of Ramzan Decorators, recording merchandise purchases
returns and allowances in the purchases account.
a) Purchases PRs 800 of fabrics from Pak Mills on credit, terms 2/10-
N/30.
b) Paid the amount owed on the invoice within the discount period.
c) Discovered that many of the fabrics were not colour fast and
returned items with an invoice price of PRs 450, receiving credit
d) Purchased PRs 350 of fabrics from Pak Mills on credit, terms 2/10-
N/30.
e) Received a cheque for the balance owed from the return in (c),
after deducting for the purchase in (d).
Solution:
Particulars Debit Credit
Purchase 800

5. 5
Trade payable
(Purchase fabrics on
credit-terms 2/10-N/30)
800
Trade payable
Purchase return &
discount
Cash
(Paid payment in discount
period)
800
16
784
Trade payable
Purchase discount &
allowances
441
09
450
Purchases
Trade payable
Purchase discount &
allowance
( Purchase fabrics on credit
term
2/10-N/30)
350
343
07
Cash
Trade payable
98
98
Trade Payable Account

6. 6
800
441
98
800
343
1143 1143
Uncollectible account
expense
Definition:
When a business or company does not
receive payment for goods or services, the transaction must be recorded
as an expense for unpaid balance.
 Accounts receivable that cannot be collected are called
Uncollectible Accounts.
 The amount of accounts receivable not collected is recorded as an
expense in the Uncollectible
Accounts Expense

7. 7
 Uncollectible Account Expense, also known as a bad-debt
expense
 At the end of the fiscal year, a business does not know which
customer accounts will become uncollectible, so a business can
calculate an estimate amount of uncollectible accounts expense.
 Before an account is classified as uncollectible, it usually becomes
a "doubtful" account. Companies and banks keep a cash reserve
for these accounts, which is a contra account to the loan or
receivable account. Once an account is deemed uncollectible, it
must be written off.
Estimating uncollectible accounts expense does two things:
 Reports a balance sheet amount for Accounts Receivable that
reflects the amount the business expects to collect in the future.
 Recognizes the expense of uncollectible accounts in the same
period in which the related revenue is recorded.
We record uncollectible accounts with two methods
 Direct method & Direct write off method
 Provision method
 Direct Method:
When a business is unable to collect payment on goods and services
that were sold on credit to its customers, it "writes off," or recognizes
this loss on its books. The direct write-off of Uncollectible expense or

8. 8
bad debt is a method commonly used by small businesses and
companies that are not required to use generally accepted accounting
principles, or GAAP, to maintain their books.
Direct write-off method is one of the two most common accounting
techniques of debts treatment. In the direct write-off method,
uncollectible accounts receivable are directly written off against income
at the time when they are actually determined as bad debts or
Uncollectible expense. When debt is determined as uncollectible, a
journal entry is passed in which bad debts expense account or
Uncollectible account expense account is debited and accounts
receivable account is credited as shown below.
Direct write-off method does not use
Any allowance or reserve account.
Although the direct write-off method is simple, it has a major drawback.
Often it violates the matching principle of accounting because it
recognizes bad debt expense which is partly related to previous
accounting period. For example if sales are made at the end of
accounting year 20X1, bad debts will be realized in the beginning
months of accounting year 20X2. Thus the use of direct write-off
method would cause deduction of expenses of previous period against
Uncollectible account
expense
——
Accounts Receivable ——

9. 9
revenue of current period which is contrary to the matching principle of
accounting.
Since this method is not according to GAAP, it not advised to use direct
write-off method. Instead, the allowance method of bad debts treatment
is preferred.
Example:
Company A has attempted to collect $6,350 from Company XYZ for
several months. Company A's collection department has been informed
that Company XYZ has gone out of business, and they have instructed
the process owners to write off the amount owed.
For income tax purposes, the journal entry to account for this write-off
would be:
Date Account Debit Credit
3/31/20XX Un collectible account expense $6,350
Accounts receivable: company XYZ $6,350
Write off of Company XYZ

10. 10
Examples:
07-02-2014
Using direct write off method:
10-07-2014
Note: Uncollectible
account expense shows in income statement as a marketing expense.
 Provision or Allowance method:
The provision method is one of the two common techniques of
accounting for bad debts, the other being the direct write-off method.
Provision method is a better alternative to the direct write-off method
because it is according to the matching principle of accounting. In
provision method, the doubtful debts are estimated and Uncollectible
Trade receivable
Sale
(sale on credit)
1000
1000
Uncollectible
account expense
account
Trade
receivable
(write off)
1000
1000

11. 11
account expense is recognized before the debts actually become
uncollectible.
Uncollectible expense is recognized early because bad debts are
probable and they can be estimated to a fairly accurate extent therefore
they fulfill the criteria required for recognition of contingent losses and
it is necessary to recognize Uncollectible account expense.
Recognition Entry
The first step in the provision method is to pass an adjusting entry at
the end of an accounting period to recognize estimated bad debts
expense. Unlike direct write-off method, we do not credit accounts
receivable at this stage because it is actually a control account of many
individual debtor accounts and we do not yet not know which particular
debtor will make a default. We only know the estimated amount of
receivables which are likely to end up uncollected. Therefore a provision
account called provision for doubtful accounts is credited in
the adjusting entry. Thus:
The Uncollectible expense account, just like any other expense account,
is closed to income summary account of the period. The allowance for
doubtful debts is contra-asset account. It is presented on balance
sheet by subtracting it from accounts receivable as shown below:7
Uncollectible account expense 600
Provision for Doubtful Accounts 600

12. 12
Trade Receivable $15,000
Less: Provision for Doubtful Accounts − 600
Accounts Receivable, net $14,400
Write-off Entry
In the next period, when a debt is actually determined as uncollectible,
the following journal entry is passed to write it off.
As more and more debts are written off, the balance in the provision
account decreases.
Recovered Bad Debts
When any bad debt is recovered, two journal entries are passed. The
first one reverses the write-off entry and the second one is a routine
journal entry to record collection. Thus:
Provision for Doubtful Debts 70
Trade Receivable 70
Trade Receivable 70
Provision for Doubtful Debts 70
Cash 70
Trade Receivable 70

13. 13
Examples:
1:
07-12-2014
31-12-2014
Adjusting entry
In balance sheet:
Trade receivable 100000
Less: Provision for doubtful account 40000
Balance show’s in balance Sheet 96000
In income statement:
Balance show’s as Uncollectible account expense 40,000
2:
31-12-2001
Trade receivable 100000
Trade receivable 100000
Sale 100000
Uncollectible account expense 40000
Provision for doubtful account 40000

14. 14
Less: Doubtful debt 5000
95000
31-12-2001
Closing entry:
2002:
07-03-2002
Note: In provision method we can’t touch uncollectible account expense
throughout the year.
10-07-2002
31-12-2002
Trade receivable 70000
Less: Provision for doubtful debt 6000 64000
Uncollectible account expense 5000
Provision for doubtful account 5000
Income summary account 5000
Uncollectible account expense 5000
Provision for doubtful account 1000
Trade receivable 1000
Provision for doubtful account 4500
Trade receivable 4500
Uncollectible account expense 6500

15. 15
Provision for doubtful account
Uncollectible account expense
Uncollectible account expense
3:
7-02-2003
Provision for doubtful debt 6500
5000 B
5000
5000 (balance of
2001)
5000
1000
4500
6000
5000 B
6500
11500 11500
6000 B
5000 5000
5000 5000
6500 6500
6500 6500
Provision for doubtful debt 500

16. 16
10-09-2003
07-11-2003
31-12-2003
Trade receivable 90000
Provision for doubtful
debt 10000
80000 (Assume)
Trade receivable 500
Provision for doubtful debt 1500
Trade receivable 1500
Provision for doubtful debt 2000
Trade receivable 2000
5000 B
5000
5000 (balance of
2001)
5000
1000
4500
6000
5000 B
6500

17. 17
31-12-2003
On receiving cash from
customer treated as
defaulter
In provision method:
06-07-2003
In direct write off method:
11500 11500
6000 B
500 8000
1500
2000
10000
14000 14000
B 10000
Uncollectible account expense 8000
Provision for doubtful account 8000
Trade receivable 5000
Provision for doubtful
account
5000
Cash 5000
Trade receivable 5000

18. 18
06-07-2003
Trade receivable 5000
Uncollectible account expense 5000
cash 5000
Trade receivable 5000