Question

For a company using the allowance method, the collection of an account receivable that has previously been

written off will have what effect on the financial statements?

		A: Increase                     L: Decrease                       SHE: Increase
		A: Decrease L: Decraese SHE: No Effect
		A: No effect L: Increase SHE: Decrease
		A: Decrease L: No effect SHE: Decrease
		A: No effect L: No effect SHE: No effect

Answer 1

Correct answer

A: Increase                    

L: Decrease                      

SHE: Increase

Explanation

When accounts receivable is reinstated Accounts receivables increase, when cash is received then cash is debited and accounts receivables is credited, the net effect is increase in cash asset.

Allowance for doubtful account is decreased with the reinstated entry of accounts receivables.

Shareholder’s equity is increased because loss earlier recorded is recovered.

There are basically two entries done when a accounts receivable is recovered which was earlier written off. First is to create an asset of accounts receivable and then the receipt of cash from receivable.