Accounting Question
Introduction
Bad Debt Expense:
Bad Debts are accounts receivable that a company does not expect to collect and have written off to the income statement as an expense. Recognition of bad debt expense also results in a corresponding decrease in the accounts receivable balance on the balance sheet because irrecoverable debts are no longer an asset.
Methods of accounting of bad debts:
- Direct Written of Method
- Allowance for Doubtful Accounts Method
In the given problem, we are given the allowance for doubtful accounts, so let us look into the Allowance for Doubtful Accounts Method and calculate the bad debt expense.
Allowance for Doubtful Accounts Method:
In this method, doubtful debts are estimated and bad debts are recognized before the debts actually become uncollectable. The first step in the allowance method is to pass an adjusting entry at the end of the accounting period to provide for the bad debts expense. This is in line with the matching principle where the expense is charged in the same accounting period where revenue is earned.
We do not credit accounts receivable at this stage because it is actually a control account of many individual debtors' accounts and we do not yet know which debtor will turn default. We only know the estimated amount which is likely to end up uncollected. Therefore, a provision account called the allowance for the doubtful account is credited in the adjusting entry.
It is also called allowance for uncollected accounts or allowance for bad debts account.
Step by step
Solved in 2 steps
