9 Accounts Receivable

BANNER PLACEHOLDER

Now you might be thinking: what if a company receives cash from a customer unexpectedly? When receiving payment from a customer whose account has been written off, we simply reinstate that account then receive payment. For example, if Still receives $1,000 from CustomerA in a bankruptcy settlement, we’ll simply record a journal entry to reinstate the account for $1,000, then record the receipt:

You have recorded the second transaction, the cash receipt many times before. This is an increase in cash because Still is receiving money, and a decrease in Customer A’s receivable account. After these journal entries are recorded, the balance of Customer A’s account will be zero. This is appropriate because we don’t expect to receive any further cash from this bankrupt company.

Give it a try, continuing from the Cissi example. Then check your work against the solutions. You’ve got this!

Well done! Great work!

In this chapter we’ve explored the Allowance MethodAllowance Method:
The practice of maintaining an allowance for doubtful accounts contra-account to reduce A/R to its estimated collectible amount. See also: Allowance for doubtful accounts, A/R aging summary.. It uses the Allowance for Doubtful Accounts to reduce Accounts Receivable to its net realizable value.

A/R (gross) – Allowance for Doubtful Accounts (AFDA) = A/R (net)

In conclusion, let’s look at the components of allowance for doubtful accounts in a T-account format. This account gets bigger when its adjusted to its ending balance. This adjustment is a credit because Allowance for Doubtful Accounts is a contra-account. The account gets smaller when specific customer accounts are written off.

Here’s one last example to put everything together.

Well done! You’ve reviewed sales transactions where customers purchase on account, and you’ve learned how to use the allowance method to measure A/R.