Preston Enterprises uses the direct write-off method of accounting for uncollect

Question

Preston Enterprises uses the direct write-off method of accounting for uncollectible accounts. On October 12, a very large account was written off. The amount was subsequently recovered on December 15. Ray Preston, the owner of the company, instructed the accountant to not make a journal entry for the recovery and to hold the check in his desk until after the first of the year "for tax purposes."

1. If you were the accountant, what would you think of Preston's request?

2. If the December 15 entry is not made, how will it affect Preston's current year financial statements and what are the possible consequences of holding the check?

Explanation / Answer

Hi,

Please find the answers as follows:

a) I would have found the request of the owner as not correct/unethical, as the main objective behind the request would be to indicate lesser income for tax purposes.

b) If the journal entry is not passed, it would result in an understatment of income in the profit or loss account/income statement resulting in a lower taxable income. Secondly, it would show lower accounts receivables in the books and the amount of cash will be less as the recovery will not get adjusted.

Thanks.

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