Question

the net realizable value of accounts receivable not change when you write off an uncollectible account using allowance method. Explain in detail.

Answer 1

• Under Allowance Method, Bad Debt expense is estimated at the end of accounting period thorough an adjusting entry. The adjustment is made by debiting Bad Debt expense account and crediting Allowance for Uncollectible account.
• Allowance for Uncollectible account is a ‘contra asset’ account having a Credit balance. This is presented in the Balance Sheet on Asset side as a deduction of Gross Accounts receivables.
• Lets for example say that Accounts receivable balance is $ 50,000 and balance in Allowance account is $ 5000. The presentation in Balance Sheet will be:

Partial Balance Sheet
Current Assets:
Accounts receivables	$                                   50,000.00
Less: Allowance for Uncollectible Accounts	$                                     5,000.00
Net realizable value of Accounts receivables		$                  45,000.00

• Hence, Net Realizable Value = Gross Accounts receivables – Allowance for Uncollectible account.
• Remember that Accounts receivable is an asset account which increases when debited and decreases when credited. Allowance account is a ‘contra asset’ account which increases when credited and decreases when Debited.
• Now, the question states that Net realizable value of accounts receivables will not change when uncollectible account is written off using allowance method. This is true because, when the account is written off, Allowance account is debited and accounts receivables is credited.
• Let take out existing example, say that $ 2000 of accounts receivable became uncollectible and are to be written off. The journal entry would be:

General Journal	Debit	Credit
Allowance for Uncollectible expenses	$                                     2,000.00
Accounts receivables		$                     2,000.00

• Balance after above entry:

>Accounts receivables = $ 50,000 - $ 2,000 = $ 48,000
>Allowance account = $ 5000 - $ 2000 = $ 3,000

• Let’s prepare partial balance Sheet again with updated balances:

Partial Balance Sheet
Current Assets:
Accounts receivables	$                                   48,000.00
Less: Allowance for Doubtful Accounts	$                                     3,000.00
Net realizable value of Accounts receivables		$                  45,000.00

• You will notice that Net Realizable value remains same as $ 45,000 as it was before in the earlier Balance Sheet presentation above.
• That’s how and why the Net realizable value of accounts receivables will not change when uncollectible account is written off using allowance method.