Say there’s a situation where you consider a receivable being doubtful, you write it down and after a while your customer still pays the balance. How would you treat such a transaction in your accounting?
On one hand you’ve accounted the expense for the write-down, on the other you’ve added a reserve account under assets showing their real value (that is, you’ve shown they may hold no value and are hence written down). However, now, as it turns out, your client paid up something you already wrote to expenses.
When treating this transaction, the first recognition is ensuring that the expense is now shown as “income”. That is, you’d show a credit entry on the same expense account where you initially recognized the expense itself. So that’s entry number one.
Entry number two in such a situation is showing that you actually got money (that is showing a debit entry on cash or cash equivalent account) and with the same entry you also show that you collected a receivable. Since you didn’t write off a receivable from the balance sheet, you can show something being collected.
|1||Debit||Allowance for doubtful receivables||500|
|Credit||Receivables write-down expense account||500|
|2||Debit||Cash and cash equivalents||500|