Harvey Company uses the allowance method to account for uncollectible accounts. An account that had been previously written-off as uncollectible was recovered. How would the recovery affect the company's accounting equation?
A)Increase assets and increase equity.
B)Increase assets and decrease liabilities.
C)Reduce liabilities and increase equity.
D)Have no effect on assets, liabilities or equity.

Question

Quizplus · Accepted Answer

Harvey must first reinstate the receivable that was previously written off. The reinstatement increases assets (accounts receivable) and decreases assets (increases the contra-asset allowance for doubtful accounts), with no overall effect on the financial statements. Next, Harvey records collection of the receivable, which increases assets (cash) and decreases assets (accounts receivable), again with no overall effect on assets. The event is reported as a cash inflow for operating activities on the statement of cash flows.

Harvey Company Uses the Allowance Method to Account for Uncollectible