[student007]

Okay... I find it easiest to explain this issue regarding hidden reserves and allowance accounts through an example, so I hope this makes clear what I'm asking:

Let's say a company decides to use a rate for estimated uncollectables, X, for hidden reserves (higher amount - overstating bad debts), and then, after a few years, goes back to a rate of Y (lower rate, more accurately reflecting bad debts). To increase its net income in this year, what entry would be entered? Here's what I think:

Dr. Bad debt expense XXXXX
Cr. Allowance account XXXXX

XXXXX = total allowance with Y rate minus current balance in allowance account (from buildup with overestikmated X rate) to achieve desired balance in allowance account of Y% of credit sales. In this way, the bad debt is expensed by less than it would be if Y% was used all along, or if X% was used all along.

Is this correct? If not, what would the correct entry be?

Thanks