How to Journalize a Bad Debt Expense
A company may use the percentage of sales method to estimate a company's bad debt expense. Bad debt expense exists as an income statement account that decreases sales revenue. A company uses past history to determine the percentage of credit sales that are noncollectable. For instance, a company may determine from past history that 4 percent of its accounts receivable will be noncollectable. The company must multiply 4 percent times the total amount of accounts receivable to calculate bad debt expense.
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Instructions
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1
Enter the date of the bad debt expense in the general journal. Write the day and month when the company determines the percentage of accounts receivable that are noncollectable.
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2
Calculate the bad debt expense. Multiply the estimated percent of noncollectable accounts by total accounts receivable for the period. For instance, a company that has an estimated noncollectable account percentage of four with $200,000 total accounts receivable has a bad debt expense of $8,000.
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3
Debit bad debt expense for the applicable amount. Using the example in step 2, the company must write an $8,000 debit for bad debt expense. This entry illustrates an increase in the bad debt expense, which decreases a company's revenue.
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4
Credit allowance for doubtful accounts for the applicable amount. The credit for allowance for doubtful accounts should equal the debit entry for bad debt expense. In this scenario, the company must credit allowance for doubtful accounts for $8,000.
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