[Claire]

I’ve been wondering something for a long time and wondering if you know the answer. Under the Allowance Method for recognizing Bad Debt, when there is a recovery of bad debt after it has been expensed, why is Allowances increased again with a credit. Why not just credit Bad Debt Expense to clear the Bad Debt entry made in the first place as with the Direct Write Off method. I know Allowances is Debited once the receivable is written off, but I don’t see why Allowances should be credited if the receivable is recovered. It leaves a permanent contra-asset account on the balance sheet but seems unnecessary to be left on the financials, unless of course you have more receivables next year and need to increase Bad Debt again, you can use the buffer in Allowances from last year. I guess I’m wondering why this rule was made.

[Rob]

When you recover bad debt under the allowance method, you need to put the AR back on the books by first reversing the previous entry ——— Debit to AR and Credit the Allowance for Doubtful Accounts and then the second step is to Debit Cash and Credit AR. Otherwise you would be be incorrectly hitting the income statement. This way the bad debt expense is only adjusted after calculating and adjusting the Allowance for Doubtful Accounts.

[Author]

Replies