Question

The general ledger account for Accounts Receivable shows a debit balance of $50,000. The Allowance for Doubtful Accounts has a credit balance of $1,000.
If management estimates that 5% of Accounts Receivable will prove uncollectible, Bad Debts Expense would be recorded for _______.

Answer 1

Answer:

$2,500

Explanation:

Bad debts are debts that have been estimated to be irrecoverable, in that case such debts are normally written off to profit and loss account and eliminated by a credit entry to the debtors account.

The allowance for doubtful accounts are provisions made for debts in the account receivable accounts that may be considered doubtful of collection.

The accounting entry for doubtful debt is a debit to profit and loss account and a credit to provision for doubtful debt account. Provision for doubtful debt is made after bad debt has been deducted from the debtors account.

Therefore 5% of $50,000 = $2,500 represents provision for bad debt.