How to Adjust an Entry to Record a Bad Debt Expense
Accounts receivable occur when a company sells goods or services on credit to other businesses or individuals. Unfortunately for many business owners, some customers do not pay their bills, meaning the company will not be paid for the goods or services provided. A company must recognize that a certain number of accounts will go uncollected and record those transactions as a bad debt expense. Bad debt expense is an income statement account that illustrates the company’s loss as far as issuing credit to customers is concerned.
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Instructions
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1
Calculate the amount of the bad debt expense. Use prior-year financial data to estimate the percentage of sales the company will not collect. Confirm the company’s total sales amount, and multiply total sales by the percent of sales you estimate the company cannot collect. Assume a company has $5 million in sales and the company estimates it cannot collect 5 percent of sales. In this scenario, the company’s bad debt expense equals $250,000.
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2
Write the date in the general journal. The day and month indicates when the company recognizes the percent of sales that will not be collected.
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3
Debit bad debt expense for the applicable amount. Using the calculation from Step 1, the company must debit bad debt expense for $250,000. Bad debt expense appears on a company’s income statement. Debiting bad debt expense increases the expense, which decreases the company’s net income.
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4
Credit allowance for doubtful accounts for the appropriate amount. The credit to allowance for doubtful accounts must match the debit entry for bad debt expense. In the example, the company must credit allowance for doubtful accounts for $250,000.
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