How to Adjust an Entry for an Allowance for a Bad Debt Expense
If your business offers credit to customers, you will have customers who do not pay their bills. Several reasons exist why this might occur, such as financial hardships for the customer, an accounting oversight or unscrupulous behavior. When accounts go long periods of time without being paid, the amounts must be removed from the current accounting cycle, and placed in accounts especially created for these balances. Two accounts Allowance For Doubtful Accounts and Bad Debt Expense are used to reflect the balances of accounts from which you do not expect to receive payment.
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Instructions
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1
Determine the amount of accounts receivable that are not recoverable. Examine your accounts and look for any that are extremely past due. Accounts that are at least 60 days past due usually indicate an account will go unpaid, especially if attempts to collect the past due amount have gone ignored.
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2
Credit the uncollectible amount to the Allowance For Doubtful Accounts. For example, if after examining the Accounts Receivable account you determine that $500 is uncollectible, you would credit the Allowance For Doubtful Accounts by $500.
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3
Debit Bad Debt Expense for the uncollectible amount. This account removes the debt from your current books. The account can be used to determine which, if any, of the bad debt accounts you might choose to collect through legal means. So, if you credited the Allowance For Doubtful Accounts by $500 in Step 2, you would debit the Bad Debt Expense by $500.
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Complete closing entries. At the end of the accounting period, the total amount in the Bad Debt Expense account will be credited and closed out. The amount is debited to the Income Summary.
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Tips & Warnings
Allowance For Doubtful Accounts appears on the balance sheet. It carries a balance from one accounting period to another. Bad Debt Expense appears on the Income Statement and is closed out to the Income Summary at the end of the accounting period.
Although crediting Allowance For Doubtful Accounts decreases Accounts Receivable, no adjusting entry is applied to the Accounts Receivable account. If you receive a payment, debit Allowance for Doubtful Accounts and credit Accounts Receivable.
