Question

Q 8.8: What is the effect of the collection of an account that had been previously written off under the allowance method of accounting? A : It will increase income in the period it is collected. B : It requires a correcting entry for the period in which the account was written off. C : It will decrease income in the period it is collected. D : It does not affect income in the period it is collected.

Answer 1

Answer:

The answer is: A : It will increase income in the period it is collected.

Explanation:

Under the allowance method, the company estimates bad debt expenses. So any bad debt written off will affect only the balance sheet by:

• Dr Allowance for doubtful accounts
• Cr Accounts receivable

If unexpectedly your client decides to pay their debt, this should be recorded as:

• Dr Accounts receivable
• Cr Allowance for doubtful accounts

and then the payment should be recorded increasing the income for the current period:

• Dr Cash
• Cr Accounts receivable