Question

In 2018, Oriole Company had net credit sales of $1125300. On January 1, 2018, Allowance for Doubtful Accounts has a credit balance of $26100. During 2018, $42000 of uncollectible accounts receivable were written off. Past experience indicates that the allowance should be 12% of the balance in receivables (percentage of receivables basis). If the accounts receivable balance at December 31 was $376000, what is the required adjustment to the Allowance for Doubtful Accounts at December 31, 2018

Answer 1

At December 31, 2018, the adjustment to the Allowance for Doubtful Accounts is $19,020 (the difference between the opening balance and closing balance).

This amount ($19,020) is credited to the Allowance for Doubtful Accounts to bring the balance to $45,120 which represents 12% of the Accounts Receivable at December 31, 2019. The contra debit entry goes to Bad Debts Account, representing the amount of Allowance expensed for the year 2018.

Step-by-step explanation:

The Allowance for Doubtful Accounts is a contra account that adjusts the Accounts Receivable balance. The purpose is to provide for estimated bad debts for the period.

This account nets the balance of Accounts Receivable in the balance. The Income Statement effect is a reflection of the opening balance and closing balance. It may be debit or credit expense depending on whether the closing balance increased or decreased vis-a-vis the opening balance.

The percentage of receivable basis is one of the methods for determining the allowance for doubtful debts. This method uses an estimated percentage, e.g. 5%, and applies it on the closing balance to ascertain what should be the closing balance on the Allowance for Doubtful Debts Account at period end. Therefore, the percentage is multiplied against the Accounts Receivable balance to obtain a dollar amount.

The dollar amount becomes the new balance. This balance is compared with the opening balance to obtain an adjustment that brings the closing balance to the new level.