Answer:
Debit : Bad Debts = $4,200
Credit : Allowance for doubtful debts = $4,200.
Explanation:
The question states that bad debts are expected to be 6% of the accounts receivables. Credit sales were $250,000 of which $180,000 was collected. Hence, accounts receivables is ($250,000 - $180,000) = $70,000.
This means that the allowance for doubtful debts is it is: $70,000 x 6% = $4,200.
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 6% 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 = $4,200
Credit : Allowance for doubtful debts = $4,200.
When the amount is officially declared uncollectible, the allowance for doubtful debts account will be debited and the accounts receivables account will be credited.
