Answer:
Debit : Bad Debts = $33,000
Credit : Allowance for doubtful debts = $33,000
Explanation:
The question states that the allowance for doubtful debts are expected to be 10% of the accounts receivables. As at 31 December, accounts receivables is $330,000
This means that the allowance for doubtful debts is it is: $330,000 x 10%= $33,000
An account for allowance for doubtful debts is a contra account created, predicting that certain debtors will not be able to pay for the goods and services they purchased. The 10% may be based on historical experiences. Doubtful debts aren’t officially uncollectible, it is simply an estimation made, but bad debts are, where you have officially written off a certain accounts receivable as uncollectible.
An allowance for doubtful debts is recorded in the balance sheet, directly under accounts receivables. Bad debts are recorded as an expense in the income statement.
The entry to record the above transaction is:
Debit : Bad Debts = $33,000
Credit : Allowance for doubtful debts = $33,000
When the amount is officially declared uncollectible, the allowance for doubtful debts account will be debited and the accounts receivables account will be credited.
