Question

Upon writing off the remaining accounts receivable balance of $3,000 on a $9,000 bill on December 31, 2016, a clinic received $500 toward payment on the account on Feb 10, 2017. The letter attached to the check indicated that the estate of Patient X had been probated and final disbursements from the estate were being made to the known creditors. Your accountant has deposited the $500 check and has indicated that the check would be recorded to the non-operating income account. You are the Hospital’s auditor and have come across this transaction during a review of the March 2017 financial statements. Is this transaction correct? If not, describe the process of how you would have received this payment.

Answer 1

Treatment of recovery of Bad debts written off earlier is not correct.

Accounts receivable are created when sales are made on credit .sales is a part of normal operations of business(operating activity) .In case if any of the receivables is not recoverable ,it is written off as bad debt .

Any amount recovered out of bad debt written off afterwards will be treated as operating income as that amount represents that part of income which we considered as non receoverable .

In the given situation , amount recovered as disbursement from estate of receivables is to be treated as operating income as such operations are generated in ordinary course of business (that is from operations of business).

b)The amount recovered should be (added to operating income) and subtracted from non operating income.