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ACCA Applied Knowledge · Financial Accounting · Statement of profit or loss and other comprehensive income

A company previously wrote off a debt of $900 as irrecoverable. In the current year the customer unexpectedly pays the full $900 in cash. What is the correct accounting treatment?

Debit cash and credit the irrecoverable debts expense in profit or loss for $900. The original write-off was expensed, so recovering the money reverses that expense. It is not new sales revenue, and it is not credited directly to the allowance or to retained earnings.

  1. ADebit cash $900; credit irrecoverable debts expense (profit or loss) $900Correct
  2. BDebit cash $900; credit allowance for receivables $900
  3. CDebit receivables $900; credit sales $900
  4. DDebit cash $900; credit retained earnings directly $900

Explanation

The write-off earlier debited irrecoverable debts expense. When the cash is later received, the debt is reinstated and the receipt recorded, with the net effect that the expense is reversed through profit or loss. The allowance is only an estimate for existing receivables, and crediting sales would double count revenue.

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