Question

: Graves Construction is journalizing two transactions related to uncollectible accounts. The first transaction does not affect cash flows, but the second transaction does affect cash flows. If Graves Construction uses the allowance method to account for uncollectibles, which of the following scenarios may pertain to these transactions?

Answer 1

Answer:

'Bad debts write off' AND 'Recovery of Bad debts written off'

Explanation:

The Journal entry to write off a bad account affects only balance sheet accounts:

a debit to Allowance for Doubtful Accounts and a credit to Accounts Receivable.

No expense or loss is reported on the income statement because this write-off is "covered" under the earlier adjusting entries for estimated bad debts expense.

HOWEVER in scenario 2 where transaction involves a cashflow, it is a bad debt recovered transaction because upon recovery of bad debt previously written off

a debit to CASH and credit to Bad debts recovered account

Answer 2

Answer:

The first transaction should be to write-off of an uncollectible account (or bad debt), while the second transaction refers to the collection of a previously written-off bad debt.

Explanation:

The journal entry to record the write-off of an uncollectible account:

Dr Bad debt expense

    Cr Allowance for uncollectible accounts

Allowance for uncollectible accounts is a contra asset account that reduces accounts receivable.

The journal entries to record the collection of a bad debt:

Dr Accounts receivable

    Cr Bad debts expense

Dr Cash

    Cr Accounts receivable

The collection of the previously written off bad debt increases cash flows.