Chapter 7, Problem 5DQ

To determine

Bad debts: It refers to the amount that was expected to be received on credit sales but went uncollectible. It is a loss to the company.

Allowance for doubtful accounts: It refers to the amount that is use to keep aside by the company as a provision for the part of accounts receivable that may go uncollectible.

To explain: The reason of written off a bad debt against the allowance for doubtful accounts not reducing the estimated realizable value of a company’s accounts receivable.

Explanation:

• The writing off a bad debt against the allowance for doubtful accounts does not reduce the estimated realizable value of a company’s accounts receivable.
• The reason behind it, is that writing off bad debts against allowance for doubtful accounts would have the effect on accounts receivable and allowance for doubtful accounts both with the same amount by leaving the actual difference same between them.
• The writing off a bad debt against allowance for doubtful accounts includes the journal entry of debiting allowance for doubtful accounts by crediting accounts receivable with the same amount for both the accounts.
• So, the actual difference between the amount of the two remains the same and that results in neither decrease nor increase in the estimated realizable value of a company’s accounts receivable