Allowance for doubtful accounts



Q20. Allowance for doubtful accounts
On December 31, 20×1, Entity A had $150,000 balance of accounts receivable. It is estimated that 3% of accounts receivable balance may be uncollectible. Before this journal entry, Entity A had zero balance in the allowance for doubtful accounts.
Prepare a journal entry to record the amount that may be uncollectible.

A20. To recognize the portion of accounts receivable that may be uncollectible, bad debts expense is recorded on the debit side and the allowance for doubtful accounts is recorded on the credit side.

To increase the balance of the allowance for doubtful accounts to $4,500:

  Debit Credit
Bad debts expense 4,500  
     Allowance for doubtful accounts   4,500

[Note]
1. Increase in bad debts expense (expense): debit
2. Increase in the allowance for doubtful accounts (contra-asset): credit
3. Bad debts expense = $150,000 x 3% = $4,500
4. The allowance for doubtful accounts is a contra-asset account, which is presented as a subtraction from accounts receivable.

[Exercise]
On December 31, 20×1, Entity B had $250,000 balance of accounts receivable. It is estimated that 2% of accounts receivable balance may be uncollectible. Before this journal entry, Entity B had a credit balance of $1,600 in the allowance for doubtful accounts. Prepare a journal entry to record the amount that may be uncollectible.

To increase the balance of the allowance for doubtful accounts to $5,000:

  Debit Credit
Bad debts expense 3,400  
     Allowance for doubtful accounts   3,400

[Note]
1. Increase in bad debts expense (expense): debit
2. Increase in the allowance for doubtful accounts (contra-asset): credit
3. Bad debts expense = $250,000 x 2% = $5,000
4. The allowance of doubtful accounts had a credit balance of $1,600.
5. To increase the balance of the allowance of doubtful account to $5,000, a credit of $3,400 is added to the allowance for doubtful accounts.
6. $5,000 – $1,600 = $3,400

[Exercise]
To estimate the amount that may be uncollectible, the aging schedule of accounts receivable can be used.

Days (*1) Balance (*2) % (*3) Estimated amount (*4)
0-30 days $60,000 0% 0
31-60 days $40,000 1% $400
61-90 days $15,000 3% $450
over 91 days $7,000 5% $350
Total $122,000   $1,200

[Note]
(*1) Days in accounts receivable
(*2) Balance of accounts receivable
(*3) % of accounts receivable that may be uncollectible
(*4) Estimated amount of bad debts expense

If the allowance of doubtful accounts had zero balance, the following journal entry is prepared to increase the balance of the allowance for doubtful accounts to $1,200:

  Debit Credit
Bad debts expense 1,200  
     Allowance for doubtful accounts   1,200

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