Chapter Five

5. Cash and receivables

Introduction
 Financial statement users focus on a variety of information
in making credit and investment decisions.
 Investors, long-term creditors, and short-term creditors are
interested in a company’s financial flexibility, the ability
to use its financial resources to adapt to change.
 One part of a company’s financial flexibility that external
users are concerned about is liquidity.
 Liquidity is the availability of a company’s liquid assets
(cash or assets that may be quickly converted into cash) to
pay its bills.
• The most common liquid assets are cash, temporary
investments, accounts receivable, and notes receivable.
Cash
• Cash is the resource on hand to meet planned payments
and emergency situations.
• The amount a company reports as cash in the current assets
section on its balance sheet must be available to pay
current obligations.
• There must not be any contractual restrictions that
prevent the company from using this money to pay its
current debts.
• To be report as “cash” it must be readily
available for the payment of current
obligations, it must be free from any contractual
restriction that limits its use in satisfying
debts.
• Cash classified as a current asset includes coins,
currency, unrestricted funds on deposit with a
bank (either checking accounts or savings
accounts1), negotiable checks, and bank drafts.
• On the other hand, some items may be confused
with cash but normally are listed under other
balance sheet captions.
• Among these items are certificates of
deposit, bank overdrafts, postdated
checks, travel advances, and postage
stamps.
• (CDs) are short-term investments issued
by banks that allow a company to invest
idle cash for short periods of time.
• CDs normally are classified as
temporary investments. Bank
overdrafts are overdrawn checking
accounts. They are reported as current
liabilities and should not be offset
against positive balances in other bank
• Postdated checks are included as
receivables until the date they become
negotiable.
• Travel advances are funds or checks given to
company employees to cover out-of-pocket
expenses while traveling on company business.
• Since travel advances are satisfied when the
employee submits receipts for business
expenses, they are classified as prepaid items.
• Postage stamps on hand are classified as
prepaid items because they will be used rather
than exchanged for cash. Below is a diagram
that summarizes what is, and what is not, included
in cash.
Characteristics of Cash
• The following are some of the
characteristics of cash:
a)Cash is used as medium of
exchange
b)Cash is the most liquid asset
c)Cash is mostly affected by business
transactions
d)Cash is used to measure the value
of other assets
e)Cash is mostly exposed to
 Cash and Cash
• Cash Equivalents
equivalents are short-term,
highly liquid investments that are
readily convertible into known
amounts of cash and so near their
maturity that there is little risk of
changes in value because of changes
in interest rates.
• Generally, only investments with
maturity dates of three months
or less from the date acquired by
the holder are cash equivalents.
 Cash Management
 Each company must ensure that it has enough
cash to pay its current obligations.
• However, it must recognize the fact that idle
cash is a non productive resource.
• Although a company may wish to protect itself
against business failure by amassing a large
amount of cash to keep itself liquid, it can
improve its performance by investing these
funds and earning interest.
• Proper cash management requires that a
company invest its idle cash and estimate the
timing of its cash inflows and outflows to
ensure that it has enough cash to meet its
needs.
• Cash planning systems are those
methods and procedures that a
company uses to ensure that it has
adequate cash available to meet
maturing obligations and that it
invests any unused or excess cash.
• Cash control systems are the
methods and procedures a company
uses to safeguard its funds.
• A company’s cash budget is the major
component of its cash planning
system.
• Cash control systems require adequate
internal control measures.
• Internal control is the process (policies
and procedures) a company uses so that
its financial reports are reliable, its
operations (including safeguarding its
assets) are effective and efficient, and
that it complies with applicable laws and
regulations.
• Since cash cannot be traced easily,
internal control over cash is enhanced by
routine reviews of the accuracy of
recorded cash transactions and by
• Cash control systems can be subdivided
into two main functions: (1) control over
receipts and (2) control over payments.
• The control procedures a company
adopts for its cash receipts should be
designed to safeguard all cash inflows
from the time they arrive at the company
until they are deposited in its bank
account.
• The key elements in a cash receipts
internal control system are immediate
counting of receipts by the person
opening the mail or the salesperson
• The control procedures for
payments should ensure that only
authorized payments are made for
actual company expenditures.
• The key elements in a cash payments
internal control system include
making all payments by check so there
is a record for every company
expenditure, authorizing and signing
checks only after an expenditure is
approved, and periodically reconciling
the cash balance in the bank statement
with the company’s accounting records.
Petty Cash
• A petty cash system involves a cash fund
under the control of an employee that
enables a company to pay for small
amounts that might be impractical or
impossible to pay by check.
• For example, a company requiring
employees to work overtime may have a
policy of sending late-working employees
home by taxi.
• Since taxi drivers do not usually accept
checks, the company may give these
employees cash to pay the taxi fare.
• Small amounts of cash may also be needed
• A company may use a petty cash
system for these purposes.
• The design and operation of a
petty cash system includes the
following steps:
1.An employee is appointed petty
cash custodian.
 The petty cash fund is
established at an amount estimated
to be enough to cover expenditures
over a short period of time, and the
fund is turned over to the employee.
2.Petty cash vouchers are printed,
prenumbered, and given to the
custodian of the fund.
 The vouchers are used as
evidence of expenditures.
Therefore at all times the total of
the cash in the fund plus the
amounts of expenditure vouchers
should be equal to the original
amount of the fund, in this case
$500.
The custodian completes a petty
3. When the amount of cash in the
petty cash fund becomes low and/or at
the end of an accounting period, the
vouchers are sorted into expense
categories and then remaining cash is
counted.
The expenses are then recorded
and the fund is replenished.
At this time, a Cash Short and Over
account is used to record any
“shortage” or “overage” between the
original petty cash fund balance
The account helps to highlight errors
and improve internal control.
For example, assume that a count at
the end of the month shows $67.54
remaining in the petty cash fund, and
the sorting of vouchers indicates the
following costs were incurred during the
month:
Office supplies $ 34.16
Postage 178.00
Transportation 132.14
Miscellaneous 83.76
• Since these expenses total $428.06 and the amount
needed to replenish the fund is $432.46 ($500 - $67.54),
the fund is “short” by $4.40.
• The company records (debits) the actual expenses (along
with Cash Short and Over), rather than petty cash, as
follows when it replenishes the fund:
• Office Supplies Expense 34.16
• Postage Expense 178.00
• Transportation Expense 132.14
• Miscellaneous Expense 83.76
• Cash Short and Over 4.40
• Cash 432.46
The $432.46 is given to the fund
custodian, and the actual amount of
cash in the petty cash fund is now
equal to the original fund balance of
$500.
 The company reports the expenses
on its income statement.
It reports a debit balance in the
Cash Short and Over account at
the end of the accounting period as
a miscellaneous expense; it reports a
credit balance as a miscellaneous
• Bank Reconciliation
• The information in a company’s Cash
account is also kept by an external
independent party, the
company’s bank.
• Therefore it is a good internal control
procedure to use one to verify the
other.
• A bank reconciliation is a
schedule that a company
prepares to analyze the difference
between the ending cash balance in
Causes of the Difference
 The causes of the difference between the cash balance listed
on a company’s bank statement and the balance shown in
the company’s cash account include the following items:
1. Outstanding Checks.
 An outstanding check is a check written by the company
and deducted from its cash balance that the bank has not yet
deducted from the balance reported on the bank statement.
• On the date a company issues a check, it reduces its Cash
account.
• A period of time is necessary for the check to be received
by the payee (the recipient of the check), deposited in the
payee’s bank, and subtracted from the company’s bank
balance.
Therefore a company has a certain
number of outstanding checks at the
end of each month that causes its
Cash account balance to be less than
the balance on the bank statement.
2. Deposits in Transit.
 A deposit in transit is a cash receipt
added to the company’s cash balance but
not yet added to the balance reported on
the bank statement.
When a company receives a check, it
increases its Cash account.
A period of time may pass before the
• At the end of each month the company
may have deposits in transit (either
cash or checks) that cause its Cash
account balance to be greater than
the balance on the bank statement.
3.Charges Made Directly by the Bank.
A bank frequently imposes a service
charge for a depositor’s checking
account and deducts this charge
directly from the account.
Banks also charge for the cost of
printing checks and for stopping
• NSF (not sufficient funds) is the term
used for a customer’s check that a company
has deposited in its bank account but has
not been paid by the customer’s bank
because there is not enough cash in the
customer’s account.
• Because the bank has not received
payment from the customer, it deducts
this amount from the company’s bank
account.
• Consequently, there may be some NSF
checks included in the bank statement that
the company has not recorded.
• At the end of the month the bank lists all of
• Therefore the bank statement balance
is less than the balance in the
company’s Cash account.
4.Deposits Made Directly by the
Bank.
• A bank often acts as a collection
agency for its customers on items such
as notes receivable.
• In addition, most checking accounts
earn interest.
• When the bank collects a note, it
records the amount (principal and
The company may not know the
amount of interest it has earned on its
checking account until it receives the
bank statement.
 In both these situations the bank
statement balance is greater than the
balance in the company’s Cash
account.
5.Errors.
• Despite the internal control
procedures established by the bank
and the company, the company may
 A company may similarly make an
error in recording an amount. For
example, a common error is to
transpose two numbers, so that the
correct amount of $426 is recorded
as $462.
Procedures for Preparing a
Bank Reconciliation
• Given the items that might cause a
difference between the ending
balance in a company’s Cash
account and the ending cash
i) Compare the deposits listed in the
company’s records with the deposits
shown on the bank statement.
These deposits do not need any
adjustment in the bank reconciliation.
 If they are not shown on the bank
statement, immediately investigate to
determine if an error or theft has
occurred.
 Identify any deposits for the current
month that are not listed on the
bank statement.
Add the amounts of all the deposits
ii)Compare the checks listed in the
company’s records with the checks
shown on the bank statement.
These checks do not need any
adjustment in the bank reconciliation.
If they are not shown on the bank
statement, investigate to determine if
the checks were received by the creditors
so that the company’s “credit rating” is
not affected.
Identify any checks for the current
month not deducted in the bank
statement.
iii) Identify any deposits or
charges made directly by the bank
that are not included in the
company’s records.
 These items include collections of
notes receivable, interest earned on
the checking account, service
charges, NSF checks, and so on,
which are listed on the bank
statement.
Add the collections to or subtract the
charges from the company’s
iv) Determine the effect of any errors. If
an error is found, the nature of the error
determines whether to add the error to or
subtract the error from the company’s
ending cash balance or from the ending
cash balance of the bank statement.
v) Complete the bank reconciliation.
Use the format we discuss below.
A company is required to report on its
balance sheet the amount of cash over
which it has control at the end of an
accounting period. Our discussion
focuses on the form of reconciliation that
arrives at an adjusted, or corrected, cash
Cash balance from bank statement $7,218
Add: Receipts recorded on the company’s records but not
reported on the bank statement.

Examples: deposits in transit and cash received and recorded 629

but not yet deposited
$7,847
Deduct: Payments recorded on the company’s records but
not reported on the bank statement.

Example: outstanding checks (516)

Adjusted Cash Balance $7,331

Cash balance from company records $6,925

Add: Add: Receipts reported on the bank statement but not

recorded on the company’s records.
Examples: Examples: notes receivable and interest collected 715
by the bank or interest earned on the funds on deposit
$7,640
Deduct: Payments reported on the bank statement but
not recorded on the company’s records.

Examples: bank service charge and customers’ checks (309)

returned for lack of funds (NSF checks)

Adjusted Cash Balance $7,331

• After the company completes the bank
reconciliation, it makes journal entries
to bring its accounts up to date.
Example: Bank Reconcilation
The following example shows the
preparation of a bank reconciliation
and the required adjusting entries for
the Crown Corporation for the
month ended June 30, 2007.
The unadjusted cash balances
are as follows:
Cash balance from bank statement, June
The bank statement disclosed the
following information:
1.A customer note for $1,200 plus $12
interest was collected on June 29.
2.A customer check for $138.14 was returned
because of insufficient funds (NSF check).
3.The monthly service charge was $15.
CA review of the company records
disclosed the following:
1.A deposit for $1,142.87 at the end of the
day on June 30 did not appear on the bank
statement.
2.Customer checks totaling $327.40 were on
hand at the end of June awaiting deposit.
• #862 $ 96.19
• #864 147.18
• #865 263.25
4.Check #843, written for $91.20 in
payment of an account payable and
included with the canceled checks in the
bank statement, was erroneously recorded
as $19.20 in the company’s records.
Required:
a)Prepare a bank reconciliation for the
Crown Corporation for June 30, 2007.
b)Prepare the journal entries necessary to
adjust Crown’s books on June 30, 2007.
EXAMPLE: Bank Reconciliation and Adjusting Entries
Bank Reconciliation
Crown Corporation
June 30, 2007
Cash balance from bank $12,461.15
statement
Add: Deposit in transit
$1,142.87
Checks on hand 327.40 1,470.27
Sub Balance $13,931.42
Deduct: Outstanding checks:
#862 $ 96.19
#864 147.18
#865 263.25 (506.62)
Adjusted Cash Balance $13,424.80
Cash balance from company $12,437.9
records 4

Add: Note collected by bank

$1,200.00

Interest on note 12.00 1,212.00

Sub Balance
$13,649.94

Deduct: Bank service charge $ 15.00

NSF check returned 138.14
Error in recording check #843 72.00 (225.14)
Adjusted Cash Balance $13,424.8
0
Adjusting Entries
June 30. Cash in Bank .................................1,212.00
Notes Receivable (note collected) ..................................1,200.00
Interest Revenue (interest collected) .................................. 12.00

30. Miscellaneous Expense (bank service charge) ..........15.00

Accounts Receivable (NSF check) .........................138.14
Accounts Payable (error) ......................................72.00
Cash in Bank .................................................225.14
Accounts Receivable
Receivables are claims held against
customers and others for money, goods,
or services.
For financial statement purposes,
companies classify receivables as either
current (short-term) or noncurrent (long-
term).
Companies expect to collect current
receivables within a year or during the
current operating cycle, whichever is
longer.
They classify all other receivables as
• Customers often owe a company
amounts for goods bought or
services rendered.
• A company may subclassify these
trade receivables, usually the most
significant item it possesses, into
accounts receivable and notes
receivable.
• Accounts receivable are oral
promises of the purchaser to pay for
goods and services sold.
• They represent “open accounts”
 Notes receivable are written promises to pay a certain
sum of money on a specified future date.
 They may arise from sales, financing, or other
transactions.
 Notes may be short-term or long-term.
Nontrade receivables arise from a variety of
transactions.
Some examples of nontrade receivables are:
1.Advances to officers and employees.
2.Advances to subsidiaries.
3.Deposits paid to cover potential damages or losses.
4.Deposits paid as a guarantee of performance or
payment.
5.Dividends and interest receivable.
6.Claims against:
a)Insurance companies for casualties
sustained.
b)Defendants under suit.
c)Governmental bodies for tax refunds.
d)Common carriers for damaged or lost
goods.
e)Creditors for returned, damaged, or lost
goods.
f)Customers for returnable items (crates,
containers, etc.).
Because of the peculiar nature of nontrade
receivables, companies generally report them as
separate items in the balance sheet.
 Illustration 5 – 2 shows the reporting of trade and
nontrade receivables in the balance sheets of Molson
Coors Brewing Company and Seaboard
Corporation.
• ILLUSTRATION 5 – 2
• RECEIVABLES BALANCE SHEET
PRESENTATIONS
i Molson Coors Brewing Company(in thousands)
Current assets
Cash and cash equivalents $ 377,023
Accounts and notes receivable
Trade, less allowance for doubtful accounts of 758,526
$8,827
Current notes receivable and other receivables, 112,626
less allowance for doubtful accounts of $3,181
Inventories 369,521
Maintenance and operating supplies, less 34,782
allowance for obsolete supplies of $10,556
Other current assets, less allowance for 124,336
advertising supplies of $948
Total current assets $1,776,814
 Seaboard Corporation(in thousands)
Current assets
Cash and cash equivalents $ 47,346
Short-term investments 286,660
Receivables
Trade $251,005
Due from foreign affiliates 90,019
Other 26,349
367,373
Allowance for doubtful accounts (8,060)
Net receivables 359,313
Inventories 392,946
Deferred income taxes 19,558
Other current assets 77,710
Total current assets $1,183,533
• The basic issues in accounting for accounts
and notes receivable are the same:
recognition, valuation, and
disposition.
Recognition of Accounts Receivable
• In most receivables transactions, the
amount to be recognized is the exchange
price between the two parties.
• The exchange price is the amount due from
the debtor (a customer or a borrower).
• Some type of business document, often an
invoice, serves as evidence of the
exchange price.
 (1) the availability of discounts (trade and cash
discounts), and (2) the length of time between the
sale and the due date of payments (the interest
element).
Trade Discounts
 Prices may be subject to a trade or quantity
discount.
 Companies use such trade discounts to avoid
frequent changes in catalogs, to alter prices for
different quantities purchased, or to hide the true
invoice price from competitors.
 Trade discounts are commonly quoted in
percentages.
• For example, say your cell phone has a list
price of $90, and the manufacturer sells it to Best
Buy for list price less a 30 percent trade discount.
• The manufacturer then records the receivable at
$63 per phone.
• The manufacturer, per normal practice, simply
deducts the trade discount from the list price and
bills the customer net.
• As another example, Maxwell House at one time
sold a 10-ounce jar of its instant coffee listing at
$5.85 to supermarkets for $5.05, a trade discount
of approximately 14 percent.
• The supermarkets in turn sold the instant coffee
for $5.20 per jar.
• Maxwell House records the receivable and related
sales revenue at $5.05 per jar, not $5.85.
Cash Discounts (Sales Discounts)
 Companies offer cash discounts (sales
discounts) to induce prompt payment.
 Cash discounts generally presented in terms
such as 2/10, n/30 (2 percent if paid within 10
days, gross amount due in 30 days), or 2/10,
E.O.M., net 30, E.O.M. (2 percent if paid any
time before the tenth day of the following
month, with full payment due by the thirtieth of
the following month).
 Companies usually take sales discounts unless
their cash is severely limited. Why? A company
that receives a 1 percent reduction in the sales
price for payment within 10 days, total
payment due within 30 days, effectively earns
• Companies usually record sales and
related sales discount transactions
by entering the receivable and sale at
the gross amount.
• Under this method, companies recognize
sales discounts only when they receive
payment within the discount period.
• The income statement shows sales
discounts as a deduction from sales
to arrive at net sales.
• Some contend that sales discounts not
taken reflect penalties added to an
established price to encourage prompt
,
ILLUSTRATION ENTRIES UNDER GROSS AND NET METHODS OF
RECORDING CASH (SALES) DISCOUNTS
Gross Method Net Method
Sales of $10,000, terms 2/10, n/30
Accounts Receivable 10,000 Accounts Receivable 9,800

Sales Revenue 10,00 Sales Revenue 9,800

0
Payment on $4,000 of sales received within discount period
Cash 3,920 Cash 3,920
Sales Discounts 80 Accounts Receivable 3,920
Accounts Receivable 4,000
Payment on $6,000 of sales received after discount period
Cash 6,000 Accounts Receivable 120
Accounts Receivable 6,000 Sales Discounts Forfeited 120
Cash 6,000
Accounts Receivable 6,000
 If using the gross method, a
company reports sales discounts as
a deduction from sales in the income
statement.
 Proper expense recognition dictates
that the company also reasonably
estimates the expected discounts to
be taken and charges that amount
against sales.
 If using the net method, a company
considers Sales Discounts Forfeited
as an “Other revenue” item.
Nonrecognition of Interest Element
• Ideally, a company should measure
receivables in terms of their present value,
that is, the discounted value of the cash to
be received in the future.
• When expected cash receipts require a waiting
period, the receivable face amount is not worth
the amount that the company ultimately
receives.
• To illustrate, assume that Best Buy makes a
sale on account for $1,000 with payment due in
four months.
• The applicable annual rate of interest is 12
percent, and payment is made at the end of
four months.
Valuation of Accounts Receivable
 Reporting of receivables involves (1)
classification and (2) valuation on the
balance sheet.
 Classification involves determining the
length of time each receivable will
be outstanding.
 Companies classify receivables intended
to be collected within a year or the
operating cycle, whichever is longer, as
current.
 All other receivables are classified as
long-term.
Determining net realizable value requires
estimating both uncollectible receivables
and any returns or allowances to be
granted.
Uncollectible Accounts Receivable
As one revered accountant aptly noted,
the credit manager’s idea of heaven
probably would be a place where
everyone (eventually) paid his or her
debts.
 Unfortunately, this situation often does
not occur.
For example, a customer may not be able
Similarly, individuals may be laid off from
their jobs or faced with unexpected
hospital bills.
Companies record credit losses as
debits to Bad Debt Expense (or
Uncollectible Accounts Expense).
 Such losses are a normal and necessary
risk of doing business on a credit
basis.
Two methods are used in accounting for
uncollectible accounts: (1) the direct
write – off method and (2) the allowance
method.
Under the direct write-off method, when a company
determines a particular account to be uncollectible,
it charges the loss to Bad Debt Expense.
Assume, for example, that on December 10 Cruz
Co. writes off as uncollectible Yusado’s $8,000
balance. The entry is:
December 10 Bad Debt Expense ..............8,000
Accounts Receivable
(Yusado) ...................8,000
(To record write-off of Yusado account.
 Under this method, Bad Debt Expense will show
only actual losses from uncollectibles. The
company will report accounts receivable at its
• As a result, using the direct write – off
method is not considered appropriate,
except when the amount uncollectible is
immaterial.
Allowance Method for Uncollectible
Accounts
The allowance method of accounting for
bad debts involves estimating
uncollectible accounts at the end of each
period.
This ensures that companies state
receivables on the balance sheet at their
net realizable value.
• Thus, the allowance method is
appropriate in situations where it is
probable that an asset has been
impaired and that the amount of the
loss can be reasonably estimated.
• Although estimates are involved,
companies can predict the percentage of
uncollectible receivables from past
experiences, present market conditions,
and an analysis of the outstanding
balances.
• Thus, the FASB requires the allowance
method for financial reporting purposes
1.revenues in the same accounting period
in which they record the revenues.
2.Companies debit estimated uncollectibles
to Bad Debt Expense and credit them to
Allowance for Doubtful Accounts (a contra –
asset account) through an adjusting entry
at the end of each period.
3.When companies write off a specific
account, they debit actual uncollectibles
to Allowance for Doubtful Accounts and
credit that amount to Accounts
Receivable.
• Recording Estimated Uncollectibles. To
illustrate the allowance method, assume that
Brown Furniture has credit sales of
$1,800,000 in 2012.
• Of this amount, $150,000 remains uncollected
at December 31.
• The credit manager estimates that $10,000 of
these sales will be uncollectible.
• The adjusting entry to record the estimated
uncollectibles is: December 31
Bad Debt Expense ...................10,000

Allowance for Doubtful Accounts .....10,000

(To record estimate of uncollectible
 Brown reports Bad Debt Expense in the income statement as an
‘
operating expense. Thus, the estimated uncollectibles are matched
with sales in 2012. Brown records the expense in the same year it
made the sales.
 As Illustration 5 – 4 shows, the company deducts the allowance
account from accounts receivable in the current assets section of the
balance sheet.
 PRESENTATION OF ALLOWANCE FOR DOUBTFUL ACCOUNTS
 BROWN FURNITUREBALANCE SHEET (PARTIAL)
Current assets
Cash $ 15,000
Accounts receivable $150,000

Less: Allowance for doubtful accounts 10,000 140,000

Inventory 300,000
Prepaid insurance 25,000
Total current assets $480,000
Allowance for Doubtful Accounts shows
the estimated amount of claims on
customers that the company expects
will become uncollectible in the future.
Companies use a contra account instead
of a direct credit to Accounts Receivable
because they do not know which
customers will not pay.
The credit balance in the allowance
account will absorb the specific write-offs
when they occur.
The amount of $140,000 in Illustration
above represents the net realizable
• Recording the Write – Off of an Uncollectible
Account.
 When companies have exhausted all means of
collecting a past-due account and collection
appears impossible, the company should write
off the account.
 In the credit card industry, for example, it is
standard practice to write off accounts that are
210 days past due.
• To illustrate a receivables write – off, assume
that the financial vice president of Brown
Furniture authorizes a write – off of the $1,000
balance owed by Randall Co. on March 1, 2013.
The entry to record the write – off is:
March 1, 2013 Allowance for Doubtful Accounts .......1,000
Accounts Receivable (Randall
Co.) .............................1,000 (Write –
off of Randall Co. account)
• Bad Debt Expense does not increase when the
write – off occurs.
• Under the allowance method, companies debit
every bad debt write – off to the allowance
account rather than to Bad Debt Expense.
• A debit to Bad Debt Expense would be
incorrect because the company has already
recognized the expense when it made the
adjusting entry for estimated bad debts.
• Instead, the entry to record the write-off of an
uncollectible account reduces both Accounts
Recovery of an Uncollectible
Account.
• Occasionally, a company collects from
a customer after it has written off the
account as uncollectible.
• The company makes two entries to
record the recovery of a bad debt: (1) It
reverses the entry made in writing off
the account.
• This reinstates the customer’s account.
(2) It journalizes the collection in the
usual manner.
• July 1 Accounts Receivable (Randall
Co.) ..........1,000
Allowance for Doubtful
Accounts .............................1,000
(To reverse write – off of
account)
Cash ...........................................1,000
• Accounts Receivable (Randall
Co.) .................. 1,000
(Collection of account)