How to Adjust Journal Entries for Bad Debt Expenses With a Debit Balance
A company may write off bad debts against a specific account, or make a provision of a percentage of sales. Where the debt relates to an identifiable account, there is no posting to bad debts expenses. The only accounts affected are the balance sheet accounts of allowance for bad debts and accounts receivable. Where a company provides against a percentage of sales, the transaction affects the bad debts expense account.
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Instructions
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Debit the bad debts expense account and credit the allowance for bad debts account with a percentage of sales. In the first year of using the receivables method, multiply the net credit sales for the year by the chosen percentage. For example, if net sales are $100,000 and the company estimates that 5 percent of all sales are doubtful, debit the expense account with $100,000 multiplied by 5 percent, which equals $5,000. Credit the allowance for bad debts account with the same amount.
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Account for a increase in doubtful debts in subsequent years by posting the difference in the allowance only. Imagine, for example, that in year two net sales were $150,000. Multiply $150,000 by 5 percent, which equals $7,500. Deduct the existing provision of $5,000 and post the balance. In the example, debit bad debts expense and credit the allowance for bad debts account with $7,500 minus $5,000, or $2,500. In this way, the balance on the allowance account will reflect the current doubtful debts situation.
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Debit the allowance account if the estimated bad debt amount decreases in the following years. For example, assume that in year three net sales fell to $125,000. Calculate the allowance by multiplying $125,000 by 5 percent, which equals $6,250. This is less than the current balance on the allowance for bad debts account of $7,500. Deduct the year three figure from the balance, and post the difference of $1,250 as a reverse entry. Credit the bad debts expense account with this amount and debit the allowance for bad debts account.
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Tips & Warnings
Show the allowance for bad debts account on the balance sheet under current assets as a deduction from accounts receivable.
