Hi Jobin,
Thank you very much for your reply.
When we estimate the amount of uncollectible accounts, we debit credit loss/bad debt expense. My confusion is that if we use the income statement approach (percentage of sales) to estimate uncollectible accounts, then each period we are recognizing bad debt expense based on an estimate (percentage of sales) that never gets adjusted...is that correct? This is unlike with the balance sheet (percentage of receivables) approach since with that method we adjust the allowance account at the end of the period so that the balance is our estimated amount.
What if we end up collecting more than we estimated?
For example, let's say we did $5,000 in credit sales for the period and we estimate uncollectible accounts at 10%, so we book the following entry:
Dr. Bad debt expense $500
Cr. Allowance for uncollectible accounts $500
Then we collect $4,900 on that period's credit sales and show $100 to be uncollectible, so we book the following entries:
Dr. Cash $4,900
Cr. A/R $4,900
Dr. Allowance for uncollectible accounts $100
Cr. A/R $100
Now our total bad debt expense recognized on the P&L is $500, our A/R is $0, and our Allowance account is a credit balance of $400 which renders net A/R at a $400 credit balance. We have collected all of the period's A/R except that $100 we wrote off, so isn't our bad debt expense for the period overstated at $500?
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Katie Mincey
Accountant
Indian Trail NC
United States
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Original Message:
Sent: 04-10-2021 07:52 AM
From: Jobin Thomas
Subject: Recovery of A/R Previously Written Off
Hello Katie,
I'd like to take a stab at your question.
Let's go step by step:
1) When a company sells a product on credit it records it by Debiting (increasing) AR and Crediting (Increasing) sales.
2) When an AR account becomes uncollectible the company records it by Debiting (Reducing) Allowance for doubtful account and crediting (reducing) AR account.
3) in the future when the company receives cash on the previously written off account, it will be recorded by first reversing the Allowance account entry and then recording for cash. Let's look at that with an example. Assume $100 was written off.
Debit (Increase) AR. $100
Credit (Increase) Allowance account $100
Then,
Debit (increase) Cash $100
Credit (decrease) AR $100
As you can notice above there is no change in AR account since we are increasing and reducing at the same time. Only changes noticeable are in Cash (increasing) and Allowance account (decreasing).
Also to your question, expense is an Income statement account. It doesn't get affected by non-payment on an account.
I hope it makes sense and I apologize if I'm misstating anything here.
Jobin Thomas
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Jobin Thomas
Analyst
Warwick PA
United States
Original Message:
Sent: 04-09-2021 08:29 AM
From: Katie Mincey
Subject: Recovery of A/R Previously Written Off
I am studying for my CMA part 1 exam and reviewing subunit 2 on A/R and Inventory Measurement. The book outline states that the JE for recovering previously written off receivables does not affect credit loss (bad debt) expense. The JE is:
Dr. Cash
Cr. Allowance for bad debt
Why do we credit (increase) the allowance account here? The bad debt expense was recognized in the accounting for the estimation of uncollectible A/R; wouldn't we want to reverse that expense when we receive the cash? Can someone help me understand why are we increasing the allowance account instead of reversing the expense? It doesn't make sense intuitively to me.
Thank you very much for your help!
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Katie Mincey
Senior Accountant
Indian Trail NC
United States
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