Question

Upon completing an aging analysis of accounts receivable, the accountant for Rosco Works prepared and aging of accounts receivable and estimated that $5,000 of the $98,000 accounts receivable balance would be uncollectible. The allowance for doubtful accounts had a $400 debit balance at year-end prior to adjustment. What is the amount of bad debt expense?

Answer 1

Answer:

Bad debt expense          $ 5,400  

Accounts Receivable  $ 5,400

Explanation:

To register to amount of bad debt expenses we need to consider the current balance of the Allowance for Uncollectible Accounts.

With the indirect method of write off we have to shows the total estimated balance in the Allowance for Uncollectible Accounts, in this case $5,000.

As we have a debit balance we have to compensate that amount and show a credit balance equal to the estimated amount.  

Estimated Uncollectible $ 5,000  

Initial Balance  

Dr Accounts Receivable                                  $ 98,000  

Dr Allowance for Uncollectible Accounts  $ 400

 

What is the amount of bad debt expense?  

Bad debt expense          $ 5,400  

Accounts Receivable  $ 5,400

 

Final Balance  

Dr Accounts Receivable                                $ 98,000  

Cr Allowance for Uncollectible Accounts  $ 5,000

Bad accounts are those credits granted by the company and there is no possibility of being charged. When customers buy products on credit but the company cannot collect the debt, then it is necessary to cancel the unpaid invoice as uncollectible.          

         

"One way is to directly cancel bad debts at the time it was decided that the credit is bad, the total amount is reported as bad debt expenses that negatively affect the income statement and accounts receivable are reduced by the same amount, less assets."          

The other way is to determine a percentage of the total amount of accounts receivable as bad debts, there are many ways to analyze accounts receivable and calculate the value of bad debts.          

When the company has the percentage of uncollectible accounts, the required journal entry is Bad Expenses (debit) with Reserve for Bad Accounts (credit).          

At the time of cancellation, since the expenses were previously recognized, we only use the Provision for bad accounts (debit) with accounts receivable (credit), with this we are recognizing the bad credit of the company.