Question

You have just received notice that a customer of yours with an Account Receivable balance of $100 has gone bankrupt and will not make any future payments. Assuming you use the allowance method, the entry you make is to

Answer 1

Allowance for Doubtful Debts $100 Dr

Accounts Receivable $100 Cr

Step-by-step explanation:

Under the allowance method of recording the bad debts, we usually assign a certain percentage to the accounts receivable amount every year as being doubtful and record the bad debt expense over this allowance account. This means that we record an entry debiting bad debt expense and crediting allowance for doubtful debts using our estimation for every year.

When an accounts receivable is confirmed to have gone bad, we do not need to record bad debt expense. Rather we just debit the allowance for doubtful debts account and credit the accounts receivable account as the allowance was already made against recording the bad debt expense. Thus, the entry would be to debit the allowance account and credit the accounts receivable account.