The most common adjusting entries involving the accounts receivable account are the entries made to reclassify defaulted accounts and to write off bad debts after they have been deemed as no longer collectible or sold to a collecting agent.
The following "givens" will be used to illustrate the examples of adjusting entries for this account.
- Six installment sales totaling accounts $2,850 are already past their due dates, while the aging of accounts receivable reveals that a total of $5,350 installment sales have been past due for more than 180 days. In addition, total interests accrued by these accounts have reached $1,875. On the other hand, bad debts totaling $4,600 have been sold to the company’s collecting agent at a discounted price of $4,200.
Adjusting entries to bring the company’s installment sales receivable account to its near-accurate and proper value:
1. To reclassify accounts already past due:
Dr. Past Due Installment Sales Receivables --------- $2,850
Cr. Installment Sales Receivables --------- $2, 850
2. To take up doubtful and uncollectible accounts:
Dr. Bad Debts Expense ---------- $5,350
Cr. Allowance for Doubtful Accounts --------- $5,350
3. To reverse the accrued income on doubtful and uncollectible account:
Dr. Interest Income from Installment Sales --------- $1,875
Cr. Accrued Interest Receivable – Installment Sales --------- $1,875
4. To write off bad debts sold to collecting agents:
Dr. Allowance for Doubtful Accounts --------- $4, 600
Cr. Accounts Receivable --------- $4,600
5. To record the sale of bad debts at a discounted price:
Dr. Cash --------- $4,200
Cr. Revenue from Installment Sales --------- $4,200
Note: No loss was recognized at the time the bad debts were sold, because the original amount was already zeroed-out and was previously recognized as a loss or expense when the allowance for doubtful account was set up.
The adjusting entry examples and explanations for Merchandise Inventory, Prepaid Expenses, and Fixed Assets can be gleaned in a separate article entitled Examples of Post-Adjusted and Post-Closing Trial Balance.