A debit to bad debts expense would be incorrect

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A debit to Bad Debts Expense would be incorrect because the company has already recognized the expense when it made the adjusting entry for estimated bad debts. Instead, the entry to record the write-off of an uncollectible account reduces both Accounts Receivable and the Allowance for Doubtful Accounts. After posting, the general ledger accounts will appear as in Illustration 9-3. Accounts Receivable Allowance for Doubtful Accounts Jan. 1 Bal. 200,000 Mar. 1 500 Mar. 1 500 Jan. 1 Bal. 12,000 Mar. 1 Bal. 199,500 Mar. 1 Bal. 11,500 Before Write-off After Write-off Accounts receivable $200,000 $199,500 Allowance for doubtful accounts 12,000 11,500 Cash realizable value $188,000 $188,000 Illustration 9-3 General ledger balances after write-off Illustration 9-4 Cash realizable value comparison HAMPSON FURNITURE Balance Sheet (partial) Current assets Cash $ 14,800 Accounts receivable $200,000 Less: Allowance for doubtful accounts 12,000 188,000 Merchandise inventory 310,000 Prepaid expense 25,000 Total current assets $537,800 Illustration 9-2 Presentation of allowance for doubtful accounts A write-off affects only balance sheet accounts —not income statement accounts. The write-off of the account reduces both Accounts Receivable and Allowance for Doubtful Accounts. Cash realizable value in the balance sheet, therefore, remains the same, as Illustration 9-4 shows. Cash Flows no effect A OE L H11005 H11001 H11001 500 H11002 500 PDF Watermark Remover DEMO : Purchase from to remove the watermark
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Recovery of an Uncollectible Account. Occasionally, a company collects from a customer after it has written off the account as uncollectible.The company makes two entries to record the recovery of a bad debt: (1) It reverses the entry made in writing off the account.This reinstates the customer’s account. (2) It journalizes the collection in the usual manner. To illustrate, assume that on July 1, R. A. Ware pays the $500 amount that Hampson had written off on March 1.These are the entries: (1) July 1 Accounts Receivable—R.A.Ware 500 Allowance for Doubtful Accounts 500 (To reverse write-off of R.A.Ware account) (2) July 1 Cash 500 Accounts Receivable—R.A.Ware 500 (To record collection from R.A.Ware) Note that the recovery of a bad debt, like the write-off of a bad debt, affects only balance sheet accounts . The net effect of the two entries above is a debit to Cash and a credit to Allowance for Doubtful Accounts for $500. Accounts Receivable and the Allowance for Doubtful Accounts both increase in entry (1) for two reasons: First, the company made an error in judgment when it wrote off the account receivable. Second, after R. A. Ware did pay, Accounts Receivable in the general ledger and Ware’s account in the subsidiary ledger should show the collec- tion for possible future credit purposes. Bases Used for Allowance Method. To simplify the preceding explanation, we assumed we knew the amount of the expected uncollectibles. In “real life,” companies must estimate that amount when they use the allowance method. Two bases are used to determine this amount: (1) percentage of sales , and (2) percentage of receivables . Both bases are generally accepted. The choice is a management
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