Answer:
Allowances account will be credited with $650
Explanation:
Businesses make allowances for uncollectible debts because there are some customers that will just not honor their agreement to pay. Unfortunately, business managers can't tell from the customers looks or profile which one will default. Hence as a risk managing measure, allowances are always made.
When allowances are made, you recognize the double entry principle: debit the Bad debt expense account and credit the Accounts receivable account.
If in the closing year we had a balance of x amount in our allowance Account, and this new year we require a total allowance of say x+1 amount (coming from our computation of % of credit sales or % of Receivables balance), we will only pass the difference between the opening balance and the new year requirement to the bad debt expense account.... See below:
Opening allowance balance x
Less Closing allowance balance x+1
= bad debt expense account 1
Note : the bad debt account could be a debit where the closing allowance balance is greater than its opening. And we will credit the same amount to the allowances account to make up the requirement.
Or a credit to the p&L account if the closing balance is less than the opening balance and we will debit the same amount to the allowance account to come to the required balance
To our question:
Opening balance in allowance account = $6,500
Less New years allowance requirement = 1% x $715,000 = $7,150
= bad debt (debit) = $650 and we will credit allowances account with $650
