what is allowance for AR, when it is reversed, will it increase Asset or Liability? How does it work? Thanks.
sounds like bad debt provision
It will increase A/R and Equity. But the thing is you don’t allow allowance unless you are dead sure that it is going to result in bad debts. If it does, then you need to restate your previous financials (when the allowance was taken)
Allowance for AR: based on past experience, can be a % of AR, this will reduce AR and increase expense in IS When reversed: reversed when the AR is actually paid, increase cash and increase other income (?). CPK please help!
freakingout Wrote: ------------------------------------------------------- > Allowance for AR: based on past experience, can be > a % of AR, this will reduce AR and increase > expense in IS > > When reversed: reversed when the AR is actually > paid, increase cash and increase other income > (?). > > CPK please help! First it will increase A/R first and equity (since you are going to put the gain back into the I/S). Otherwise you income statement will not be correct. Next step would be to reduce A/R and increase cash as you normally do when a debtor pays you.
> First it will increase A/R first and equity (since > you are going to put the gain back into the I/S). > Otherwise you income statement will not be > correct. > > Next step would be to reduce A/R and increase cash > as you normally do when a debtor pays you. Somehow I disagree. You don’t reduce AR when reserved because you didn’t recognize that as AR in the 1st place. And I don’t understand your 1st paragraph. 
freakingout Wrote: ------------------------------------------------------- > Somehow I disagree. You don’t reduce AR when > reserved because you didn’t recognize that as AR > in the 1st place. And I don’t understand your 1st > paragraph. Sorry for confusing you. In the balance sheet Accounts Receivable is always shown as net: Gross Accounts Receivable - Provision for doubtful debts (PDD) = Net Accounts Receivable. Now since we are going to reverse the provision, you will be reducing PDD which is going to increase Net A/R. But if you reduce PDD, it has to balance somewhere, and that is going to be equity (it increases) through the I/S (basically a gain). Then we go to the next step that is decrease Net A/R (since Gross A/R will decrease) and increase cash.