Question

Splish Brothers has been in business several years. At the end of the current year, the unadjusted trial balance shows: Accounts Receivable $336,800 Dr. Sales Revenue 2,217,800 Cr. Allowance for Doubtful Accounts 5,944 Cr. Bad debts are estimated to be 7% of receivables. Prepare the entry to adjust Allowance for Doubtful Account

Answer 1

To adjust the Allowance for Doubtful Accounts, calculate 7% of the Accounts Receivable to find the desired balance, subtract the existing balance in the allowance account, and record the necessary adjustment as a debit to Bad Debts Expense and a credit to Allowance for Doubtful Accounts.

Step-by-step explanation:

The student's question involves preparing an adjusting entry for the Allowance for Doubtful Accounts based on an estimated percentage of the Accounts Receivable. Given that the unadjusted trial balance shows Accounts Receivable at $336,800 and the existing Allowance for Doubtful Accounts at a credit balance of $5,944, we first need to calculate 7% of Accounts Receivable to determine the desired balance for the Allowance for Doubtful Accounts. The calculation is as follows: $336,800 (Accounts Receivable) × 7% (estimated bad debts) = $23,576 (desired balance).

Now, we must adjust the Allowance for Doubtful Accounts to reflect this desired balance. Since the account already has a credit balance of $5,944, we need to determine the amount to adjust (which is the difference between the desired balance and the existing credit balance). The adjusting entry would be: $23,576 (desired balance) - $5,944 (existing balance) = $17,632 (adjustment needed).

The adjusting journal entry to record the adjustment to Allowance for Doubtful Accounts will be a debit to the Bad Debts Expense account and a credit to the Allowance for Doubtful Accounts for the amount of $17,632.

Journal Entry:

Bad Debts Expense 17,632 Dr.
Allowance for Doubtful Accounts 17,632 Cr.

Answer 2

• Prepare the entry to adjust Allowance for Doubtful Account

Bad debts are estimated to be 7% of receivables

Dr Bad Debt Expense $ 17,632

Cr Allowance for Uncollectible Accounts $ 17,632

Step-by-step explanation:

• Initial Balance

Cr Sales $ 2,217.800

Dr Accounts Receivable $ 336,800

Cr Allowance for doubtful accounts $ 5,944

• Bad debts are estimated to be 7% of receivables

Dr Bad Debt Expense $ 17,632

Cr Allowance for Uncollectible Accounts $ 17,632

• FINAL Balance

Dr Accounts Receivable $ 336,800

Cr Allowance for Uncollectible Accounts $ 23,576

If the company applies the allowance method, it means that the account Allowance for Uncollectible Accounts must show as balance the % of accounts receivables as CREDIT.

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.