[accountingmajor]

I am trying to figure out a problem with bad debts for an adjusting entry. I think I have a clue, but I'm not to sure.

If there is a bad debt estimated to be 1% of accounts receivable, do I just take 1 % of the total amount of accounts receivable and debit bad debts and credit allowance for doubtful accounts. Or is there another step I am missing, because my answer doesn't seem to match the solutions manual...

Can someone please advice me on what step I am missing..

Thank you so much.

[morgaine300]

This is the analysis of receivable method of estimating bad debt. If you were doing percent of sales method, what you're doing would work.

However, in this method, that 1% you're coming up with is the balance you want to have in the allowance account after the entry is made. For instance, if the account has a credit balance of 1000, and your 1% is 9000, that means you need to credit 8000 to get to the 9000 balance you want. Just watch out if the account has a debit balance in it. Since it's only an estimate, it can have gone negative by year-end. So same senario, but if the prior balance was 500 debit, then you need to credit 9500 to get to the 9000 balance.

[accountingmajor]

In response to your answer...

I have a debit balance in accounts receivable for $79,400 and a debit balance in allowance for $1873.

Will this be a correct adjusting entry??

(debit) accounts receivable 794
(credit) allowance for doubtful accounts 794

(debit) Bad Debt Expense 2667
(credit) allowance for doubtful accounts 2667


THANK YOU!

[morgaine300]

No, not at all. First it's AN adjusting entry, not two. You can't touch receivables. Receivables represents customers that owe the company. If you add another 794 to it, who is it that owes the company more money, and why?

You make one entry, debiting the expense and crediting the allowance. The number you come up with taking 1% of receivables is the balance you want after you make the entry. i.e. 794 would be the balance you want to be in the allowance account after the entry. The way you've done it, your two credit entries into the allowance account will come out to be 1588 balance. (That number has no meaning in this problem.)

Make a t account, put an 1873 debit balance in it, leave a blank space for the entry, draw a line, and put 794 under the line as an ending credit balance. You want it to balance to 794. What's the missing number that needs credited in that account to go from the 1873 debit balance to the 794 credit balance? (I would draw a t acct if I could, instead of trying to explain in words.)

I'm assuming with your name being "accountingmajor" that this is for class and not real life? These are some pretty strange numbers for the problem to be using. If there's only to be a 794 balance in the account, it seems very odd that the year ended with an 1873 negative balance in it. That is looking like the estimation of bad debt is WAY too low. Like ridiculously too low. Hard to believe a book would create such a situation, unless they wanted you to analyze it.

[accountingmajor]

Okay.. I think I'm giving this another shot...

Will the answer just be:

DR: Bad Debt Expense 2667
CR: Allowance for Doubtful Accounts 2667

** since 1% of the accounts receivable is 79,400 and there is a debit balance of 1873 in allowance for doubtful accounts. By doing the above entry, it will give me a credit for 794...

[morgaine300]

Yes, exactly. :-)

[accountingmajor]

Thanks So Much For The Help!!