current-assets-part-ii

Further consider that the write off has no impact on

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Unformatted text preview: hat the write off has no impact on the net realizable value of receivables, as shown by the following illustration of a $5,000 write off: 3.3 Collection of an Account Previously Written off On occasion, a company may collect an account that was previously written off. For example, a customer that was once in dire financial condition may recover, and unexpectedly pay an amount that was previously written off. The entry to record the recovery involves two steps: (1) a reversal of the entry that was made to write off the account, and (2) recording the cash collection on the account: 6-16-X6 Accounts Receivable 1,000 Allow. for Uncollectible Accounts 1,000 To reestablish an account previously written off via the reversal of the entry recorded at the time of write off *** 6-16-X6 Cash 1,000 Accounts Receivable 1,000 To record collection of account receivable It may trouble you to see the allowance account being increased because of the above entries, but the general idea is that another as yet unidentified account may prove uncollectible (consistent with the overall estimates in use). If this does not eventually prove to be true, an adjustment of the overall estimation rates may eventually be indicated. Download free ebooks at bookboon.com 15 Alternative Approaches for Uncollectibles Current Assets: Part II 3.4 Matching Achieved Carefully consider that the allowance methods all result in the recording of estimated bad debts expense during the same time periods as the related credit sales. These approaches satisfy the desired matching of revenues and expenses. 3.5 Monitoring and Managing Accounts Receivable Please click the advert A business must carefully monitor its accounts receivable. This chapter has devoted much attention to accounting for bad debts; but, don’t forget that it is more important to try to avoid bad debts by carefully monitoring credit policies. A business should carefully consider the credit history of a potential credit customer, and be certain that good business practices are not abandoned in the zeal to make sales. It is customary to gather this information by getting a credit application from a customer, checking out credit references, obtaining reports from credit bureaus, and similar measures. Oftentimes, it becomes necessary to secure payment in advance or receive some other substantial guarantee such as a letter of credit from an independent bank. All of these steps are normal business practices, and no apologies are needed for making inquiries into the creditworthiness of potential customers. Many countries have very liberal laws that make it difficult to enforce collection on customers who decide not to pay or use “legal maneuvers” to escape their obligations. As a result, businesses must be very careful in selecting parties that are allowed trade credit in the normal course of business. Download free ebooks at bookboon.com 16 Alternative Approaches for Uncollectibles Current Assets: Part II Equally important is to monitor the rate of collection. Many businesses have substantial...
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This note was uploaded on 06/07/2013 for the course BA 201 taught by Professor Cuongvu during the Fall '13 term at RMIT Vietnam.

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