Sweet Home’s reduction of the accounts receivables’ allowance should be reversed; this would increase the allowance for doubtful accounts by 150 and hence reduce the net receivables balance. So total assets decrease by 150. Can anyone explain what the hell is reduction of the accounts receivables’ allowance?
your statement above the question doesn’t make sense. however, think of an allowance as a contra asset. company incur an expense which then sits in a contra-asset account on the balance sheet. once the specific asset is charged off (cannot collect) it is charged against the contra-asset rather than that period’s earnings. this is most familiar with loans on a bank balance sheet - they keep allowance for loan and lease losses and incur provision expense each period to increase the allowance. when the loan becomes a loss - the bank charges the allowance not earnings (and eventually capital). when reversing an allowance, there is typically no change to the asset that it is intended for - its normally a reversal of an expense, so it would actually increase the current period earnings.