Whenever an account receivable from a specific customer is determined to be uncollectible, it no longer qualifies as an asset and should be written off.To write off an account receivable is to reduce the balance of the customer’s account to zero. The journal entry to accomplish this consists of a credit to the Accounts Receivable controlling account in the general ledger (and to the customer’s account in the subsidiary ledger) and an offsetting debit to the Allowance for Doubtful Accounts.
To illustrate, assume that on February 15, World Famous Toy Co. learns that a customer, Discount Stores, has gone out of business and that the $4,000 account receivable from this customer is now worthless. The entry to write off this uncollectible account receivable is:
The important thing to note in this entry is that the debit is made to the Allowance for Doubtful Accounts and not to the Uncollectible Accounts Expense account. The estimated expense of credit losses is charged to the Uncollectible Accounts Expense account at the end of each accounting period. When a particular account receivable is later determined to be worthless and is written off, this action does not represent an additional expense but merely confirms our previous estimate of the expense. If the Uncollectible Accounts Expense account were first charged with estimated credit losses and then later charged with proven credit losses, we would be double counting the actual uncollectible accounts expense. After the entry writing off the receivable from Discount Stores has been posted, the Accounts Receivable controlling account and the Allowance for Doubtful Accounts appear as follows:
Notice also that the entry to write off an uncollectible account receivable reduces both the asset account and the contra-asset account by the same amount. Thus, writing off an uncollectible account does not change the net realizable value of accounts receivable in the balance sheet. The following illustration shows the net realizable value of World Famous Toy Co.’s accounts receivable before and after the write-off of the account receivable from Discount Stores:
The fact that writing off a worthless receivable against the Allowance for Doubtful Accounts does not change the net carrying value of accounts receivable shows that no expense is entered in the accounting records when an account receivable is written off. This example bears out the point stressed earlier in the chapter. Credit losses belong in the period in which the sale is made, not in a later period in which the account receivable is discovered to be uncollectible. This is another example of the use of the matching principle in determining net income.
Write-Offs Seldom Agree with Previous Estimates
The total amount. of accounts receivable actually written off will seldom, if ever, be exactly equal to the estimated amount previously credited. to the Allowance for Doubtful. Accounts. If the amounts written off as uncollectible turn out to be less than the estimated amount, the Allowance for Doubtful Accounts will continue, to show a credit balance. If the amounts written off as uncollectible are great than the estimated amount, the Allowance for Doubtful Accounts Will acquire a temporary debit balance, which will be eliminated by the adjustment at the end of the period.
Recovery of an Account Receivable Previously Written Off
Occasionally a receivable which has been written off as worthless will later be collected in full or in part. Such collections are often referred to as recoveries of bad debts. Collection of an account receivable Previously written off is evidence that the write-off was an error; the receivable should therefore be reinstated as an asset.
Let us assume, for example that a past-due account receivable in the amount of $200 from J. B, Barker Was written off on February 16 by the following entry:
AIlowance for Doubtful Accounts:
On February 27, the Customer J. B. Barker, pays the account in full. The entry to restore Barkers account will be:
Notice that this entry is exactly the opposite of the entry made when the account was written off as uncollectible. A separate entry will be made in the cash receipts journal to record the collection from Barker. This entry will debit Cash and credit Accounts Receivable (J. B. Barker).