Reverse write off journal entry

Introduction

In business, the company may need to reverse the write-off transaction that it has made previously when it receives the cash payment from the customer’s account that has been written off. Likewise, it needs to make the reverse write-off journal entry in order to put back the customer’s account into its record first before it can record the cash collection.

When the company receives the cash payment from the written-off account, it usually needs to make the reverse write-off journal entry because there is no account to record the collected cash as the account has already been written off. This is due to, in accounting, it cannot recognize this cash collection as other income or revenue as this would make the duplicated income record.

Likewise, the reverse write-off journal entry is usually made to put back accounts receivable onto the balance sheet so that the company can properly account for the cash payment received on the account that was previously written off. Of course, the counterpart account which has been previously removed from the company’s account together with accounts receivable will also need to be put back too.

This counterpart is usually the allowance for doubtful accounts as the allowance method complies with the matching principle of accounting. However, sometimes, the company may use the direct write-off method instead when it wrote off the customer’s account. If that is the case, the counterpart account will be the bad debt expense on the income statement instead.

Of course, this direct write-off method is not in compliance with the accounting rule. Hence, such a case usually only happens on an insignificant amount which does not materially impact the financial statements when they are prepared at the end of the accounting period.

Reverse write off journal entry

Allowance method

The company can make the reverse write-off journal entry by debiting the accounts receivable that has previously been written off and crediting the allowance for doubtful accounts.

Allowance method – reverse entry:

In this journal entry, even though the accounts receivable increases due to it being put back to the balance sheet, there is zero impact on the total assets on the balance sheet. This is due to the allowance for doubtful accounts which is a contra account to accounts receivable also increase in the same amount of accounts receivable putting back on to the balance sheet.

Of course, the journal entry does not end here as there is usually a purpose of accounting for the cash received on the written-off account when the company makes this journal entry of reverse write-off. Likewise, the company usually make the journal entry of receivable collection after putting back the written-off accounts receivable on the balance sheet as below:

Collection of accounts receivable:

Direct write off method

As mentioned, sometimes, the company may use the direct-off method to write off the uncollectible account from the balance sheet. In this case, there won’t any allowance for doubtful accounts for the written-off accounts receivable.

Likewise, when the company needs to reverse the write-off entry under the direct write-off method, it can make the journal entry with the debit of accounts receivable and the credit of bad debt expense.

Direct write off method – reverse entry:

In this journal entry, total assets on the balance sheet increase while total expenses on the income statement decrease in the same amount.

It is useful to note that the direct write-off method is not allowed under the accounting rule. Specifically, the direct write-off method does not comply with the matching principle of accounting as it does not try to match the expenses from the uncollectible accounts to the revenues they generate.

This is due to, under the direct write-off method, there is no provision or allowance made for the uncollectible account before the write-off event happens. In other words, the company only records the bad debt expense when it needs to write off any customer’s account from the balance sheet.

However, the expense should have occurred long before the write-off event happens. For example, the company may decide to write off one of its customers’ accounts after it has been overdue for more than a year. In this case, the bad debt expense should have been recorded in the previous period as there has already been a sign (e.g. long overdue) that suggests the high possibility that the customer is going to default on payment.

Reverse write off example

For example, on November 30, the company ABC receive a $1,000 cash payment on account from one of its customers for the credit purchases that they have made long ago. However, the customer’s account with this $1,000 due has been written off from the company ABC’s balance sheet due to a long-overdue of the outstanding balance and the high possibility that it can never be recovered.

The company ABC uses the allowance method for dealing with any long-overdue accounts receivable in order to comply with the accounting rule.

In this case, in order to properly account for the $1,000 cash received on the account written off, the company ABC needs to reverse the write-off entry that it had made previously in order to put back the accounts receivable to the balance sheet.

Likewise, the company ABC can make the reverse write-off journal entry by debiting the $1,000 amount into the accounts receivable and crediting the same amount into the allowance for doubtful accounts as below:

Allowance method – reverse entry:

In this journal entry, while the accounts receivable increases by $1,000, its contra account which is an allowance for doubtful accounts also increases by the same amount of $1,000. Likewise, there is zero impact on the total assets of the company ABC’s balance sheet.

After the reverse write off journal entry, the company ABC can make the journal entry for accounts receivable collection with the $1,000 cash received as below:

Collection of accounts receivable:

Example 2:

For the second example, assuming the company ABC above uses the direct write-off method when it wrote off the $1,000 overdue amount of the customer’s account. In this case, there was no record of the allowance for doubtful accounts.

Instead, the counterpart account of the accounts receivable that had been removed from the balance sheet would be the bad debt expense account. Hence, when the company ABC needs to reverse the write-off transaction, the accounts that include in the entry would be the accounts receivable and bad debt expense account.

Likewise, the company ABC would make the reverse write off journal entry with the direct write off method for the $1,000 cash received as below instead:

Direct write off method – reverse entry:

Collection of accounts receivable:

Then again, the direct write-off method in this second example should not be used if the company has a material amount of bad debt expense during the period or a significant balance of the accounts receivable. This direct-off method is usually only used in the circumstance where the company rarely has receivables transactions (e.g. most of its sale is made on cash) and their balance is only a small or immaterial one.