Barnes Books allows for possible bad debts. On May 7, Barnes writes off a customer account of $6,000. On September 9, the customer unexpectedly pays the $6,000 balance. Record the cash collection on September 9.
The correct answer and explanation is :
Journal Entry – September 9 (Cash Collection)
| Date | Account | Debit | Credit |
|---|---|---|---|
| Sep 9 | Accounts Receivable | \$6,000 | |
| Allowance for Doubtful Accounts | \$6,000 | ||
| Cash | \$6,000 | ||
| Accounts Receivable | \$6,000 |
Explanation (Approx. 300 Words):
Barnes Books uses the allowance method to account for potential bad debts. This method anticipates uncollectible accounts and adjusts financial statements accordingly before an actual write-off. It adheres to the matching principle by recognizing estimated bad debt expense in the same period as the related revenue.
On May 7, a \$6,000 customer account was written off, indicating that Barnes deemed the amount uncollectible. At that time, the journal entry would have been:
- Debit: Allowance for Doubtful Accounts \$6,000
- Credit: Accounts Receivable \$6,000
This entry reduced both the accounts receivable balance and the allowance for doubtful accounts (a contra-asset), without impacting income at the time of write-off, because the expense was already recognized when the allowance was created.
However, on September 9, the customer surprisingly pays the \$6,000. Since the receivable was previously removed from the books, Barnes must first reinstate the account and then record the cash collection:
- Reinstate the Receivable:
- Debit: Accounts Receivable \$6,000
- Credit: Allowance for Doubtful Accounts \$6,000
This reverses the original write-off, restoring the account receivable.
- Record the Cash Receipt:
- Debit: Cash \$6,000
- Credit: Accounts Receivable \$6,000
This reflects the actual payment received and removes the reinstated receivable.
These two steps ensure accurate financial reporting and maintain proper audit trails. The allowance method provides a more realistic view of expected cash flows and prevents erratic swings in reported income when unexpected collections occur.