Recovery of uncollectible accounts/bad debts – allowance method

A receivable that has previously been written off may be recovered in full or in part. It is known as recovery of uncollectible accounts or recovery of bad debts.

Journal entries:

The accounting treatment of such accounts requires two journal entries. The first entry is made to reinstate the recovered account as an asset and the second one is made to record the receipt of cash.

(1). When recovered account is reinstated as an asset:

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Notice that this entry is exactly the reverse of the entry that is made when an account receivable is written off. See uncollectible accounts expense – allowance method.

(2). When cash is received from recovered account:

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Example:

The Fine company writes off a $450 account receivable from New trader on March 12, 2015. The New Trader pays the account in full on March 28, 2015.

Required: What journal entry(ies) the Fine company should prepare:

  1. to write off the account of New Trader on March 12, 2015?
  2. to reinstate the account of New Trader on March 28, 2015?
  3. to record the receipt of cash from New Traders on March 28, 2015?

Solution:

(1). When Weak Trader’s account is written off:

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(2). When Weak Trader’s account is reinstated as an asset:

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(3). When cash is received from Weak Trader:

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The second entry will reinstate the account of Weak Trader and the third entry will eliminate his account from the system.

When a customer’s account is written off due to non payment, the company will certainly not sell anymore goods to that customer on credit. In our example, however, the Weak trader has paid the full amount due from him. This payment may reinstate his creditworthiness in the eyes of Fine company. The company may therefore reconsider to sell more goods to Weak trader on credit.

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2 Comments on Recovery of uncollectible accounts/bad debts – allowance method

  1. Kenny

    Thank you so much. This helped tremendously

  2. Gerardo

    Thank you so much fot his article. I have a question with the example:
    The thrid entry only eliminates the accounts receivable for $450, ¿What happens with the “Allowance for doubtful accounts? ¿is there a fourth entry with a impairment reversal?

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