JournaldrillBad debt expense
Bad debt expense is the estimated cost of receivables that will not be collected, recorded by debiting Bad Debt Expense and crediting Allowance for Doubtful Accounts. The percentage of sales method expenses a fixed percent of credit sales; the aging method sets the allowance balance and expenses whatever is needed to reach it.
Syntax
Dr Bad Debt Expense / Cr Allowance for Doubtful Accounts| Part | What it is |
|---|---|
Bad Debt Expense (Uncollectible Accounts Expense) | Operating expense on the income statement. |
Allowance for Doubtful Accounts | Contra-asset with a credit balance, deducted from Accounts Receivable. |
Percentage of sales method | Expense = credit sales x estimated loss rate; ignores the existing allowance balance. |
Aging (balance sheet) method | Required allowance from the aging schedule minus (or plus) the existing allowance balance = expense. |
Examples
Dr Bad Debt Expense 2,000 / Cr Allowance for Doubtful Accounts 2,000Result: Expense 2,000; allowance increases by 2,000 whatever its prior balance
Credit sales 200,000 x 1% estimated uncollectible.
Dr Bad Debt Expense 4,500 / Cr Allowance for Doubtful Accounts 4,500Result: Allowance ends at the required 6,000
Aging schedule requires 6,000; allowance already has a 1,500 credit balance, so 6,000 - 1,500 = 4,500.
Dr Bad Debt Expense 6,500 / Cr Allowance for Doubtful Accounts 6,500Result: Allowance ends at 6,000
Aging requires 6,000 but the allowance has a 500 debit balance after heavy write-offs: 6,000 + 500 = 6,500.
Common mistakes
- Adjusting for the existing allowance balance under the percentage of sales method: that method records the computed percentage as expense regardless of the balance.
- Ignoring the existing balance under the aging method: the aging total is the target ending balance, not the expense.
- Crediting Accounts Receivable for the estimate: you do not yet know which customers will not pay, so the credit goes to the allowance.
Practice Bad debt expense
These drills check your answer on live data, free, no account needed.
- Bad debts: percent of salesHarbor Lane Supply estimates that 1.5% of its $240,000 of credit sales for the year will prove uncollectible. Before the year-end adjustment, Allowance for Doubtful Accounts has a credit balance of $800. Record bad debt expense using the percent-of-sales method.
- Bad debts: aging methodAn aging of Copperline Tools' receivables at year end shows that $9,450 of accounts are expected to be uncollectible. Before adjustment, Allowance for Doubtful Accounts has a credit balance of $2,100. Record the year-end adjustment.
Questions
What is the journal entry for bad debt expense?
Debit Bad Debt Expense and credit Allowance for Doubtful Accounts for the estimated uncollectible amount.
What is the difference between the percentage of sales and aging methods?
Percentage of sales focuses on the income statement and records expense as a percent of credit sales. Aging focuses on the balance sheet, sets the allowance at the expected uncollectible receivables and records expense as the plug.
Is bad debt expense an operating expense?
Yes. It is usually listed with selling or administrative expenses on the income statement.
Related
- Allowance methodThe allowance method explained: estimate uncollectibles, record the allowance, write off specific accounts against it and reinstate recoveries.
- Writing off a receivableHow to write off an uncollectible account: Dr Allowance for Doubtful Accounts, Cr Accounts Receivable (allowance method) or Dr Bad Debt Expense (direct).
- Sale on accountHow to record a sale on credit: debit Accounts Receivable, credit Sales or Service Revenue, plus the cost of goods sold entry and the later collection.
- Collecting a receivableHow to record a customer paying an invoice: debit Cash, credit Accounts Receivable. Partial payments, early-payment discounts and why there is no revenue.