[evazok]

4. During 2007, the company wrote off accounts receivables in the amount of $19,400 by debiting Bad Debts expenses and crediting Accounts Receivable

An aging of accounts receivables indicates that estimated uncollectible accounts at year-end are $23,500, I believe the entry for that part would be as follow:

DR - 23,500 - Bad Debt expenses
CR - 23,500 - Allowance for Bad Debts

Also, the beginning balance of allowance for bad debts were $14,500

So the new/adjusted balance of allowance would be 18,600 = (begining balance minus the write-off plus bad debt expenses)

= 14,500+ 23,500 - 19,400 = 18,600



Am I right, please advise?

[morgaine300]

The way you've gone about getting the ending balance is correct so you've got a wrong number in there. However, your entry is not correct. But, you also don't even need to do any of that because the ending balance is 23,500 and there was absolutely nothing to even do to get it.

When using the analysis of receivable method, what they come up with is an amount as of this date that they believe to be uncollectible. i.e. not the amount they want you to expense and add to the account. But the amount that is currently uncollectible. In other words, the amount that should be in that account as a balance. If 23,500 is estimated as uncollectible as of this day, that is the balance that needs to be in that account.

Meaning, you would need to know where the balance was prior to making the adjusting entry. And then figure out what entry needs to be made in order to reach that balance.

For example, there's 1000 in the allowance account prior to the adjusting entry, and they tell me that 5000 is estimated as uncollectible. OK, here goes my attempt at drawing this in Paint & embedding it. Hmm... well, I can't see it in the preview so I'll hope it's OK. Anyway, I have my balance prior to adj. entry in there, and then the 5000 is the ending balance I'm trying to get to. So I would need to credit 4000 to get to that 5000 ending balance. So I use 4000 in my entry.

And automatically, if I want to know the ending balance, I don't have to figure anything out -- it's 5000.

This is a balance sheet approach, so you're basing it on balances, so your entry's purpose is to get to that balance. Using % of sales is an income statement approach and is based on what expense you'd want to use for the year, so the purpose of that is coming up with what you want for the entry and never mind how the balance comes out. So you have to keep this straight.