be incorrect because the company has already recognized the expense when itmade the adjusting entry for estimated bad debts. Instead, the entry to record thewrite-off of an uncollectible account reduces both Accounts Receivable and theAllowance for Doubtful Accounts. After posting, the general ledger accounts willappear as in Illustration 8-3.A write-off affects only balance sheet accounts—not income statement accounts.The write-off of the account reduces both Accounts Receivable and Allowance forDoubtful Accounts. Cash realizable value in the balance sheet, therefore, remainsthe same, as Illustration 8-4 shows.Cash Flowsno effectASEL500500H E L P F U L H I N TCash realizable value issometimes referred to as accounts receivable(net).JWCL165_c08_356-395.qxd 7/31/09 3:20 PM Page 362
Recovery of an Uncollectible Account.Occasionally, a company collects froma customer after it has written off the account as uncollectible.The company makestwo entries to record the recovery of a bad debt: (1) It reverses the entry made inwriting off the account.This reinstates the customer’s account. (2) It journalizes thecollection in the usual manner.To illustrate, assume that on July 1, R. A. Ware pays the $500 amount thatHampson had written off on March 1.These are the entries:Accounts Receivable363(1)July 1Accounts Receivable—R.A.Ware500Allowance for Doubtful Accounts500(To reverse write-off of R.A.Wareaccount)(2)July 1Cash500Accounts Receivable—R.A.Ware500(To record collection from R.A.Ware)Note that the recovery of a bad debt, like the write-off of a bad debt, affectsonly balance sheet accounts. The net effect of the two entries above is a debit toCash and a credit to Allowance for Doubtful Accounts for $500. AccountsReceivable and the Allowance for Doubtful Accounts both increase in entry (1) fortwo reasons: First, the company made an error in judgment when it wrote off theaccount receivable. Second, after R. A. Ware did pay, Accounts Receivable in thegeneral 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. Twobases are used to determine this amount:(1) percentage of sales, and (2) percentageof receivables. Both bases are generally accepted. The choice is a managementdecision. It depends on the relative emphasis that management wishes to give toexpenses and revenues on the one hand or to cash realizable value of the accountsreceivable on the other. The choice is whether to emphasize income statement orbalance sheet relationships. Illustration 8-5 compares the two bases.