Understanding Allowance for Doubtful Accounts: Reinstating Paid-Off Receivables

In the realm of Accounting, the concept of “Allowance for Doubtful Accounts” is essential for maintaining accurate financial records and preparing for potential losses from uncollectible receivables. However, many practitioners often find themselves uncertain about the procedures involved, especially when a customer pays after their account has been written off. This blog post seeks to clarify the steps involved in recording these transactions, ensuring a proper understanding of the process.

Initial Sale and Recording Doubtful Accounts

Let’s start with the scenario where a sale is made:

1. Recording the Sale

When a sale occurs, the following journal entry is made:
– Debit Accounts Receivable (AR): $2,000
– Credit Sales: $2,000

This reflects the amount owed to the business based on the sale.

1. Recognizing Bad Debts

If there is a reasonable doubt about the customer’s ability to pay, you must record an allowance for bad debts:
– Debit Bad Debts Expense: $2,000
– Credit Allowance for Doubtful Accounts: $2,000

This entry prepares the company for potential loss by acknowledging that not all receivables may be collected.

1. Writing Off the Bad Debt

Once it is certain that the customer will not pay, the amount can be written off:
– Debit Allowance for Doubtful Accounts: $2,000
– Credit Accounts Receivable (AR): $2,000

This transaction eliminates the receivable from the balance sheet while adjusting the allowance account accordingly.

Receiving Payment After a Write-Off

Now, let’s explore what happens when the previously written-off account is paid in full:

1. Reinstating the Accounts Receivable

First, you need to reinstate the AR account since the customer has made the payment:
– Debit Accounts Receivable (AR): $2,000
– Credit Allowance for Doubtful Accounts: $2,000

This effectively reverses the write-off, bringing the receivable back onto the books.

1. Recording the Cash Receipt

After reinstatement, the next step is to record the cash received:
– Debit Bank: $2,000