Final answer:
To reinstate an account receivable using the direct write-off method, reverse the write-off by debiting Accounts Receivable and crediting Bad Debt Expense, then record the payment by debiting Cash and crediting Accounts Receivable.
Step-by-step explanation:
Reinstating an account receivable using the direct write-off method occurs when a company decides to recover an account previously written off as uncollectible. In the direct write-off method, expenses are recorded when a company deems the debt to be uncollectible; however, if the customer later pays, the account needs to be reinstated before recording the payment.
Steps for Reinstating an Account Receivable
Reverse the Write-Off: To reinstate the receivable, the company must first reverse the write-off by debiting Accounts Receivable and crediting the Bad Debt Expense (or the allowance account, if one exists). This action negates the previous write-off transaction.
Record the Payment: After reversing the write-off, the company can then proceed to debit Cash and credit Accounts Receivable as they would in a typical collection process of an outstanding debt.
This method is straightforward but can affect financial statements since bad debt expenses are recognized in a different period than the related credit sales, potentially violating the matching principle of accounting. Therefore, the direct write-off method is generally not recommended under Generally Accepted Accounting Principles (GAAP), except when the amount is insignificant, or when it's uncertain when the bad debt will occur.