Receivable

1. Record the impact of discovering that a specific receivable is uncollectible.

2. Understand the reason that an expense is not recognized when a receivable is deemed to be uncollectible.

3. Record the collection of a receivable that has previously been written off as uncollectible.

4. Recognize that estimated figures often prove to be erroneous but changes in previous year figures are not made if a reasonable estimate was made.

Question: The company in this illustration expects to collect an amount from its receivables that will not

materially differ from $93,000. The related $7,000 expense is recorded in the same period as the revenue through

an adjusting entry. What happens when an actual account is determined to be uncollectible? For example, assume

that on March 13, Year Two, a $1,000 balance proves to be worthless. The customer dies, declares bankruptcy,

disappears, or just refuses to make payment. This is not a new expense; $7,000 was already anticipated and

recognized in Year One. It is merely the first discovery. How does the subsequent write-off of a receivable as being

uncollectible affect the various T-account balances?

Answer: When an account proves to be uncollectible, the receivable T-account is decreased. The $1,000 balance is

simply removed. It is no longer viewed as an asset because it does not have future economic benefit. Furthermore,

the anticipated amount of bad accounts is no longer $7,000. Because this first worthless receivable has been

identified and eliminated, only $6,000 remains in the allowance.

The following journal entry is made to write off this account. This entry is repeated whenever a balance is found

to be worthless. No additional expense is recognized. The expense was estimated and recorded in the previous

period based on applying accrual accounting and the matching principle.