How to Reverse an Accounts Receivable
An account receivable is a promise to pay a debt incurred by the sale of goods and/or services; in layman's terms, it's an IOU. Companies generally provide services and bill customers at a later date, creating a debit balance on the accounts receivable records. Sometimes companies have to reverse accounts receivable (for example, a merchandise return or a client that fails to pay for goods or services). Reversing an accounts receivable balance involves balancing the ledger by adding the appropriate debits and credits to the correct accounts.
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Instructions
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Identify the cause that triggers the reversal of the account receivable. The two most typical scenarios involve a merchandise return or a customer who fails to pay for goods or services.
Identify the amount (in dollars) of the reversal.
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Credit the amount of the reversal to the "Accounts Receivables" account. Remember, when a sale is made, a debit is added to the account receivable. Adding the credit to the ledger reverses the process. For example: CR (credit) Accounts Receivable $500.
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3
Determine whether the reversal applies to a return on sold merchandise. If it does, debit the "Sales Returns and Allowances" account for the same amount of the previous credit. Debit the "Inventory" account and credit the "Costs of Goods sold" for the cost of the goods sold.
From the example, assuming the cost of the goods was $350
DR (debit) Sales Returns and Allowances $500
DR (debit) Inventory $350
CR (credit) Cost of Goods Sold $350
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4
Determine whether the reversal applies to a customer who fails to pay for goods or services. If this is the case, debit the "Allowance for Doubtful Accounts" for the same amount.
On the example: DR (debit) Allowance for Doubtful Accounts $500.
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Tips & Warnings
The total debit (DR) and credit (CR) amounts must balance; that is, they must share the same sum.
References
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