Question

A company estimates that $1,000 of its accounts receivable is uncollectible at the end of the period and will make the following adjusting entry:

A) Debit to Bad Debts Expense for $1,000, Credit to Allowance for Doubtful Accounts
B) Debit to Allowance for Doubtful Accounts for $1,000, Credit to Bad Debts Expense
C) Debit to Accounts Receivable for $1,000, Credit to Allowance for Doubtful Accounts
D) Debit to Bad Debts Expense for $1,000, Credit to Accounts Receivable

Answer 1

The correct answer is A, which records the estimated uncollectable accounts by debiting Bad Debts Expense and crediting Allowance for Doubtful Accounts. This reflects the company's application of the matching principle.

Step-by-step explanation:

The correct adjusting entry to record the estimate that $1,000 of accounts receivable is uncollectible is:

Option A: Debit to Bad Debts Expense for $1,000, Credit to Allowance for Doubtful Accounts

This entry recognizes the estimated uncollectible accounts as an expense of the current period. It does not directly reduce Accounts Receivable but instead increases the contra account, Allowance for Doubtful Accounts, which will be used to offset the Accounts Receivable on the balance sheet.

The journal entry would be:

Through this entry, the company is applying the matching principle, as it matches the expense to the revenues of the period in which they are earned.