How to Do an Entry for Bad Debt Expenses & Allowances for an Uncollectable Account
One of the hazards of business is bad debt. When you extend credit to your customers, even in terms of a monthly invoice, you will have a small percentage of sales that is not recoverable. Plan in advance for this risk factor by booking an allowance each month based on past performance. When the time comes to write off a balance, there is no impact to your overall sales revenue.
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Instructions
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Estimating Bad Debt
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1
Create a bad debt estimate based on your current percentage. For example, if you estimate that 5 percent of your total sales on credit become bad debt, multiply your total credit sales by .05 to determine your total bed debt estimate.
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2
Debit your bad debt expense for the amount of the bad debt. If your total sales for the period equal $50,000, at 5 percent, your bad debt estimate equals $2,500. Post a debit transaction to a bad debt expense account for $2,500.
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3
Create a balancing credit to your Allowances for Doubtful Accounts general ledger account for $2,500.
Writing Off Bad Debts
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4
Determine the total amount of the bad debt that you want to write off of the books.
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5
Post a debit to the "Allowance for Doubtful Accounts" ledger account in the amount of the write-off. For example, if you deem $1,300 unrecoverable, create a debit for $1,300.
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6
Credit the "Accounts Receivable" for $1,300 to adjust for the account you determined unrecoverable. Note on the journal entry which account you reduced and why for audit purposes.
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