Lesson 2: Uncollectible Accounts Receivable: Estimating Credit Risk
Duration of Days: 2
Lesson Objective
Students will explain why uncollectible accounts occur and differentiate between the Direct Write-Off Method and the Allowance Method. Students will calculate bad debt expense using the percentage-of-sales method and analyze the impact on financial statements.
• Why do corporations sell on account?
• Why are some accounts receivable uncollectible?
• What is the difference between the Direct Write-Off Method and the Allowance Method?
• Why does GAAP prefer the Allowance Method?
• How does estimating bad debt expense affect net income?
• Accounts Receivable
• Uncollectible accounts
• Bad debt expense
• Direct Write-Off Method
• Allowance Method
• Allowance for Doubtful Accounts
• Contra asset
• Percentage-of-sales method
• Estimation
• Net income impact
B. Accounting Principles: Identify and describe GAAP principles and explain how application impacts financial reporting.
C. Accounting Process: Complete steps of the accounting cycle and analyze financial statement impact.
Students strengthen analytical reasoning by evaluating estimation methods and explaining financial statement impact using evidence-based justification.
Description:
Students examine why businesses extend credit and how uncollectible accounts affect profitability.
Purpose:
This lesson introduces the concept of credit risk and estimation in corporate accounting. Students move beyond recording transactions to understanding that revenue recorded today may not become cash in the future.
DOK 1: Define and explain key receivable concepts.
DOK 2: Calculate bad debt expense using structured problems.
DOK 3: Analyze why estimation improves financial reporting accuracy.
Retailers, medical offices, service providers, and corporations frequently extend credit to customers.
Bad debt expense represents cash leaving the business.
• Comparison chart: Direct Write-Off vs Allowance Method
• Step-by-step modeling of adjusting entry
• Guided practice problems
• Excel modeling of percentage-of-sales calculation
• Small group discussion on credit risk
• Scaffolded note guide
• Spanish vocabulary support for ELL students
• Guided Notes
• Practice problems calculating bad debt expense
• Journalizing adjusting entry
• Exit ticket explaining why GAAP prefers the Allowance Method
• Short written reflection analyzing financial impact
• Century 21, Accounting, General Journal, 11th edition
• Online working papers (MindTap)
• Microsoft Excel software
• Sample credit sales scenario
• Direct Write-Off vs Allowance comparison chart
• Class notes, Do Now, Exit Tickets
• Projector for modeling calculations