Question

assume that a company uses the allowance method. if the company recovers an uncollectible account, what is the effect on (a) Accounts receivable, (b) Allowance for doubtful accounts and (c) uncollectible accounts expense? Explain in detail.

Answer 1

The allowance method is a system of accounting where estimation about uncollectable receivables and bad debts is done so that the reporting of accounts receivable is done at its realizable value. In other words, it’s a method that used to estimate the amount that the cash credit customers will actually pay.

Under the allowance method, if any accounts receivable is uncollectible then it is written off by reduction of such amount from Accounts Receivable. Only balance sheet accounts are effected by such  an entry of writing off a uncollectible account : a debit to Allowance for Doubtful Accounts and a credit to Accounts Receivable. Here No loss / exepense is reported on the income statement of the business concern because this write-off of accounts receivable is already "covered" under the earlier adjusting entries for estimated uncollectible account expense.

When the previously been written off receivable is recovered in full or in part. It is known as recovery of uncollectible accounts. Hence once the uncollectible account is recovered two journal entries are required to be passed.In the first entry reinstating of the recovered account as an asset is done and in the second journal entry irecord the receipt of cash is made.

1. Reinstating of recovered account as an asset

ACCOUNT NAME	DEBIT AMOUNT	CREDIT AMOUNT
Accounts Receivable     Allowance for doubtful            accounts (re-establishing account previously written off via reversal of the entry recorded at the time of write off)	XXXX	XXXX

2) the Receipt of cash from recovered account

ACCOUNT NAME	DEBIT AMOUNT	CREDIT AMOUNT
Cash a/c     Accounts Receivable (recording the collection of the account receivable)	XXXX	XXXX

a) From the above journal entries , it can be clearly understood that there will be no effect on the Accounts receivable as in the 1) entry its being debited with the same amount at which it will be credited in the 2) entry.

b ) However, Allowance for doubtful accounts will Increase, The collection made reverses the reduction made earlier when the amount was written. off in the allowance account. Hence this will increase the Allowance for doubtful accounts .

c) Allowance for doubtful accounts is a contra asset account which consists of the estimated amount of the accounts receivable that will not be collected. The journal entry for adjusting the balance in the allowance account will involve the income statement account of uncollectible accounts expense. uncollectible accounts expense is closed to income summary account of the period. uncollectible accounts expense will remain unaffected due to recovery of the uncollectible account.