Question

a. Explain straight-line depreciation and give an example of an entry.

b. What are the entries when a customer pays off their old accounts receivable balance that was already written off?

Answer 1

Answer A

Straight line depreciation involves is an easy method of calculating depreciation, which involves reducing the amount of an asset (reduced by the salvage value, if any) equally over its useful life.  

Hence, the fomula for calculating annual depreciation under this method is (cost of asset-salvage value)/useful life

While it is simple and easy to understand, the method assumes that the asset will be used equally and will have the same efficicency over its useful life, which is not generally the case.

The entry for recording depreciation under this method is as under:

The entries shall be passed generally at the end of the reporting period and the second entry is passed to reflect the actual state of profit/loss position of the company.

Answer B

In the cases of recovery of bad debts, there are 2 approaches:

Approach 1 - Under this approach, the account receivables shall be reversed with the amount of recovery by crediting the bad debt account (which was earlier debited at the time of write-off). The account receivables shall then be adjusted with the amount of recovery by debiting the same with the bank account. The same treatment can be followed under both the direct write-off method as well as the allowance for bad debts method.

In a nutshell, the following shall be the treatment:

Approach 1
Particulars	Debit	Credit	Comments
Entry at the time of write-off
Bad debt/ bad debt allowance	xx		Amount to the extent not realised
Account receivables		xx
Entry at the time of recovery
Account receivables	xx		Amount to the extent realised only
Bad debt/ bad debt allowance		xx
Bank	xx		Amount to the extent realised only
Account receivables		xx

Approach 2 - Here, a new temporary account by the name of bad debt recovery shall be created, at the time of recovery. The same shall then be credited by the amount of recovery and shall thereafter be written off to the Profit/Loss account (i.e. Income Statement).

In a nutshell, the following shall be the treatment:

Approach 2
Particulars	Debit	Credit	Comments
Entry at the time of recovery
Bank	xx		Recording amount of recovery only
Bad debt recovery		xx
Bad debt recovery	xx		Transferring such amount to P/L account
Profit/Loss Account		xx

Both the approaches have been given above so as to get a holistic perspective to such transactions. While Approach 2 appears to be simpler, would suggest following approach 1 in order to give a more accurate depiction of the accounts of the entity.

In case of any questions on the above, feel free to mention the same in the comments section.

All the best!