Using the following categories, indicate the effects of the following transactions. Indicate the accounts affected and the amounts.
- a.During the period, customer balances are written off in the amount of $11,600.
- b.At the end of the period, bad debt expense is estimated to be $9,600.
Allowance for Bad Debts
Allowance for bad debts represents the company's estimate on the amount of accounts receivable that is not expected to be collected. The allowance of bad debts has a normal credit balance, and is known as a contra-asset account. The ending balance of the allowance account is deducted to accounts receivable account in order calculate the net realizable value of accounts receivable.
Answer and Explanation:
a. When customer balances are written off, the journal entry that is made requires a debit to Allowance for Bad Debts, and a credit to Accounts Receivable. By making this entry, the allowance account and the accounts receivable balance pertaining to the unpaid balance is removed from the books.
- Allowance for Bad Debts - decrease by $11.600
- Accounts Receivable - decrease by $11,600
b. When bad debts expense is estimated using the allowance method, the journal entry requires a debit to Bad Debts Expense, and a credit for Allowance for Bad Debts. By making this entry, the expense and allowance accounts increase, which represents the increase in the estimate for the allowance for bad debts
- Bad Debts Expense - increase by $9,600
- Allowance for Doubtful Accounts - increase by $9,600
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from Accounting 101: Financial AccountingChapter 7 / Lesson 3
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