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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Allowance method

Journalize the following transactions, using the allowance method of accounting for uncollectible receivables:

Oct. 2. Received $600 from Rachel Elpel and wrote off the remainder owed of $1,350 as uncollectible.
Dec. 20. Reinstated the account of Rachel Elpel and received $1,350 cash in full payment.

To determine

Allowance method

It is a method for accounting bad debt expense, where uncollectible accounts receivables are estimated and recorded at the end of particular period.

Accounts receivable:

Accounts receivable refers to the amounts to be received within a short period from customers upon the sale of goods and services on account. In other words, accounts receivable are amounts customers owe to the business. Accounts receivable is an asset of a business.

Write-off:

Write-off refers to deduction of a certain amount from accounts receivable, when it becomes uncollectible.

To journalize: the given transactions, using allowance method of accounting for uncollectible accounts.

Explanation

Prepare the journal entry to record the collection of cash and write-off of uncollectible accounts, under direct allowance method.

Date Particulars Debit Credit
October 2 Cash $600  
  Allowance for doubtful accounts $1,350  
       Account receivable – Person RE   $1,950
  (To record cash collection and write-off of uncollectible account receivable )    

Table (1)

To record the collection of cash on account, cash account must be increased and accounts receivable must be decreased by $600.

To record this write-off of uncollectible receivables under allowance method, both allowance for doubtful accounts and accounts receivable must be decreased by $1,350. Hence,

  • Increase in cash (asset account) is debited with $600
  • Decrease in Allowance for doubtful accounts (contra-asset accounts) is debited with $1,350, and
  • Decrease in accounts receivable (asset account) is credited with ($600+$1,350) $1,950.

Reinstate the account of Person RE and record the collection of cash on account

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