Under the Allowance Method Writing Off An Uncollectible Account Affects What

Under the Allowance Method, Writing off an Uncollectible Accounts or Accounts Receivables that is estimated based on the Percentage of Sales Method (Income Statement-Method) or Percentage of Receivables Method (Balance Sheet-Method) affects Balance Sheet as it is a Contra Asset Account which is deducted from Accounts Receivable / Debtors on Balance Sheet in order to find the Net Realizable Value that is equal to Accounts Receivable - Allowance for doubtful Accounts / Provision for Doubtful Debts or Allowance For Bad Debts.

This results in updating the amount of Accounts Receivable by matching unpaid sales invoice with Uncollectibe Accounts Expense / Doubtful Debts in order to give true information about actual sales made during the accounting to the Users of Financial Statements.

Under the Allowance Method of Accounting for Uncollectible Accounts, What is the Cash Realizable Value Or Net Realizable Value

Under the Allowance Method of Accounting for Uncollectible Accounts, the Cash Realizable Value Or Net Realizable Value (NRV) is the same before and after writing off an uncollectible accounts receivable because it is the amount which is the most expected to receive from customers when they make payment and it is calculated by deducting Allowance For Doubtful Accounts, a contra asset account from Closing Balance of Accounts Receivable on Balance Sheet. The resulted value is Cash Realizable Value Or Net Realizable Value that is very sure to receive from customers whether we deduct the estimated amount of uncollectible accounts from accounts receivable or not.

Let’s us take an example to understand this case:

Before Writing Off

Suppose we have Accounts Receivable of Rs. 50000 and Allowance For Doubtful Accounts of Rs. 15000. Before Write the Cash Realizable Value / Net Realizable Value (NRV) is:

NRV = 50000 - 15000 = Rs. 35000

At the end of accounting period, we sure that Rs. 3000 out of Rs. 15000 is not certain not to be collectible from one of our customer, Mr. A, then we pass the following journal entry to remove Rs. 3000 from allowance for doubtful accounts and Accounts Receivable in order to write off uncollectible accounts as shown below:

                       Allowance for Doubtful Accounts a/c     3000

                                                                                    Accounts Receivable a/c    3000

(Write Off Rs. 3000 From Accounts Receivable)

After Writing Off

Now, after write off, the cash realizable value is as shown below:

New Credit Balance of Allowance for Doubtful Accounts = 15000 - 3000 = Rs. 12000

New Debit Balance of Accounts Receivable = 50000 - 3000 = Rs. 47000

Cash Realizable Value / Net Realizable Value (NRV) = 47000 - 12000 = Rs. 35000

Hence, we can see that the Cash Realizable Value or Net Realizable Value (NRV) is the same after write off an uncollectible accounts receivables as it was before write off.