Question

On December 31 of the current year, the unadjusted trial balance of a company using the percent of receivables method to estimate bad debt included the following: Accounts Receivable, debit balance of $97,400; Allowance for Doubtful Accounts, credit balance of $981. What amount should be debited to Bad Debts Expense, assuming 3% of outstanding accounts receivable at the end of the current year are estimated to be uncollectible?

Answer 1

Answer:

• What amount should be debited to Bad Debts Expense, assuming 3% of outstanding accounts receivable  

Dr Bad Debt Expense                                    $ 1,941  

Cr Allowance for Uncollectible Accounts  $ 1,941

Explanation:

Initial Balance  

Dr Accounts Receivable                            $ 97,400

Cr Allowance for Uncollectible Accounts  $ 981

What amount should be debited to Bad Debts Expense,    

assuming 3% of outstanding accounts receivable  

Dr Bad Debt Expense                                        $ 1,941  

Cr Allowance for Uncollectible Accounts  $ 1,941

FINAL Balance  

Dr Accounts Receivable                                $ 97,400  

Cr Allowance for Uncollectible Accounts  $ 2,922

Bad accounts are those credits granted by the company and there is no possibility of being charged.

When customers buy products on credits but the company cannot collect the debt, then it's necessary  to cancel the unpaid invoice as uncollectible.

One way is to directly cancel bad debts at the time it was decided that the credit is bad, the total amount reported as bad debt expenses negatively affect the income statement and the accounts receivable are reduced by the same amount, less assets.

The other way is to determine a percentage of the total amount of accounts receivable as bad debts, there are many ways to analyze accounts receivable and calculate the value of bad debts.

When the company has the percentage of uncollectible accounts, the required journal entry is Bad Expenses (debit) with Reserve for Bad Accounts (credit)

At the time of cancellation, since the expenses were recognized before, we only use the Allowance for Uncollectible Accounts (Debit)  with accounts receivable (credit), with this we are recognizing the bad credit of the company.