Step 5
Subsequent Possible Transactions
Here we set the year-end receivable and an allowance for doubtful accounts for SpringTime’s flower pin sales.
SpringTime is owed $100 for flower pin sales. We need to record sales of $100 and set up a receivable for $100.
dr | cr | |
---|---|---|
Accounts receivable | 100 | |
Flower Pin sales | 100 |
One of the flower pin distributors, owing $50, is having serious financial difficulties and SpringTime’s directors doubt they will ever receive the money. We need to record the allowance for doubtful accounts. An allowance for doubtful accounts is a contra account to the receivable account. The account is called a contra account because it is an "asset" account in a liability position. It does not actually represent an obligation but is there simply to be netted against the receivable amount when presenting the receivable amount on the financial statements.
The CICA handbook only permits the recognition of revenue where there is reasonable assurance as to the collectibility of the revenue (3400.07). Setting up an allowance for doubtful accounts allows us to track the reduce the receivable and the revenue presented in the financial statements while still having the entire balance recorded.
We record the following entry to reduce the receivable by the doubtful amount and reduce the revenue recognized in the year:
dr | cr | |
---|---|---|
Flower Pin sales | 50 | |
Allowance for doubtful accounts | 50 |
Subsequent Possible Transactions
If the distributor subsequently paid the $50 in the following year we would make this entry in the following year: reversing the allowance we set up in the previous entry and recording the sale, now that collection of the revenue is "reasonably assured":
dr | cr | |
---|---|---|
Allowance for doubtful accounts | 50 | |
Flower Pin sales | 50 | |
Cash | 50 | |
Accounts receivable | 50 |