Account

Describe how accounts receivable arise and how they are accounted for, including the use of a subsidiary ledger and an allowance account.

Accounts receivable arise from credit sales to customers. Accounts receivable are reported at their realizable value, which is their total amount less an estimate for the amount of uncollectible accounts. Accounts receivable are also recorded into an accounts receivable subsidiary ledger that separately lists amounts owed by individual customers. Example: X company sells its products of $1,000 to Y, and y assures that he will pay the same in the time period of 30 days then the accounts receivable are debited and sales are credited for the same amount i.e. $1,000.

All the balances of accounts receivable are transferred to the general ledger, and the subsidiary ledger is used to verify the general ledger. The subsidiary ledger is called the control account as it mentions all the details of accounts receivable of the company which is stated customer wise. It helps in giving a clear picture of amount that the company is likely to receive. The two general ledger accounts that act as control accounts for a subsidiary ledger are accounts payable and accounts receivable. These accounts act as a crosscheck of the accuracy of the subsidiary accounts. The general ledger will only include the total amount of accounts payable or accounts receivable. The subsidiary ledgers will give you the specifics of each entry (who, how much, how often) that makes up the total found in the general ledger.

Allowance account is basically a contra asset account which reduces the balance of accounts receivable that a company is likely to collect. The allowance account is a contra account to accounts receivable, the actual bad debts of $35,000 are debited to the allowance account as they are written off. The expense recorded in the statement of comprehensive income therefore represents the balance-day adjustment upon assessment of the recoverability of the accounts receivable. It includes the amount that is unlikely to be collected. While analyzing the amount that the company is likely to collect there is a particular percentage that is unlikely to be collected and the same reduces the balance of accounts receivable. It helps in bringing a realistic picture of accounts receivable.