A firm that uses the allowance method of recording credit losses wrote off the $900 account of Beta Company in November. In January, Beta paid the $900. What is the effect of the re-instatement and the payment on total assets?

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When a firm using the allowance method writes off an account, it reduces accounts receivable and the allowance for doubtful accounts by the same amount, leaving total assets unchanged. When the amount is later paid, the firm reverses the write-off (increasing both accounts receivable and the allowance for doubtful accounts) and then records the payment (decreasing accounts receivable and increasing cash). The net effect on total assets is zero because the reinstatement and payment only shift amounts within assets, without changing the total.

A Firm That Uses the Allowance Method of Recording Credit