Question

How would you describe the entries to record the disposition of accounts receivable? What is their function? By this I mean specifically what account do you debit and what account do you credit when disposing of accounts receivable using the direct write off method or the allowance method?

Answer 1

By transferring receivables to another party, the company reduces the sales to cash revenue cycle time. Also known as disposition and transfers of accounts receivable, this process provides additional cash to the business, which can be used in operations or to purchase additional assets. Disposing of accounts receivable also relieves companies of the burden of creating and staffing additional resources in their billing and collections department.

Generally, there are two ways a company can dispose of, or transfer, receivables:

Assignment: the owner of the receivable borrows cash from a lender, using accounts receivable as collateral on the loan.
Factoring: the owner of the receivable sells it to a factor, which then assumes responsibility for collecting money owed directly from customers.

Journal entry

Cash a/c . Dr.

Due from factore a/c . Dr.

(Sales discount/return)

Loss on sale of Rec. a/c. Dr.

To Acc. Rec. a/c. Cr.

In case of writing it off

Bad debt a/c. Dr.

To Acc. Rec. Cr.

And for allowance

Bad debt expenses a/c . Dr.

To allowance for bad debt a/c . Cr.

Allowance for bad debt a/c Dr.

To acc.rec. a/c