What is the meaning of "write off" an account receivable account? Is it adding allowance for doubtful acccounts(AFDA)?
How will the balance of AFDA change if received a payment for an account that had been written of in the previous year?
Accounts receivable represent sales which have been made but cash has not been exchanged. The longer an account remains outstanding, the higher the probability and risk of non-payment.
Answer and Explanation:
An account is written off when a company determines that the prior sale will not be collected. Under the direct method, the account is credited from accounts receivable and debited to bad debt expense. Under the allowance method, however, an amount is debited to bad debt expense at the end of each accounting period/accounting year and a contra account to accounts receivable is created to account for future write-offs. When an account is written off under the allowance method, accounts receivable is credited and allowance for doubtful accounts is debited. If an account that had been previously written off in the previous year the recovery is debited to cash and credited to allowance for doubtful accounts.
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from Finance 101: Principles of FinanceChapter 19 / Lesson 1