Question

On June 12, because management knew with near certainty that it had no chance of collection, Sheave Company wrote off a customer's account balance in the amount of $350. On November 3, the customer mailed a payment for $350 to Sheave. To record the receipt of this payment from the customer, the company would debit:

Answer 1

Answer:

Refer explanation

Explanation:

A bad debt is an expense that a company incurs when a debtor who owes money is unable to pay for it. Generally, firms establish an allowance for doubtful debts account in advance, for those debts that they predict won’t be recovered. An account for allowance for doubtful debts is a contra account created and may be based on historical experiences.

Doubtful debts aren’t officially uncollectible, it is simply an estimation made, but bad debts are, where you have officially written off a certain accounts receivable as uncollectible.

An allowance for doubtful debts is recorded in the balance sheet, directly under accounts receivables. Bad debts are recorded as an expense in the income statement.

When the $350 was officially declared uncollectible, the following would have taken place:

Debit: June 12 - Allowance for doubtful debts - $350

Credit: June 12 - Accounts receivables account - $350

When the payment was received after being written off, it is known as a bad debts recovery. This would be recorded in two steps:

Step 1 Reverse the original recording:

Debit: Nov 03 - Accounts receivables account - $350

Credit : Nov 03 - Allowance for doubtful debts - $350

Step 2 Record the cash receipt

Debit: Nov 03 - Cash - $350

Credit: Nov 03 - Accounts Receivables Account - $350