DIRECT WRITE-OFF METHOD ALLOWANCE METHOD

Determine that an amount is not collectible: 1. Recording estimated uncollectible amounts:

Bad Debt Expense Dr
Accounts Receivable Cr Bad Debts Expense Dr
Allowance for Doubtful Account

2. Recording the write-off of an uncollectible amount:

Allowance for Doubtful Account Dr
Accounts Receivable

3.Recovery of an uncollectible amount:

Accounts Receivable Dr
Allowance for Doubtful Account

Cash Dr
Accounts Receivable

2 ways to estimate uncollectible amounts:

a. Percentage of Sales b. Percentage of Receivables
Same journal entry Same journal entry
Estimate based on the % of sales Estimate based on % of Rece
Does not consider existing balance Consider existing balance of
of Allowance for Doubtful Account for Doubtful Accounts
METHOD

Cr

lectible amount:

Cr

Cr

Cr

b. Percentage of Receivables
Same journal entry
Estimate based on % of Receivables
Consider existing balance of Allowance
for Doubtful Accounts
Percentage of Sales Allowance for Doubtful Accounts
Ex: Estimate that 10% of sales is uncollectible $25,000 Beginning Balance
Sales = $200,000 20,000
$45,000 Ending Balance
Journal Entry
Bad Debt Expense 20,000
Allowance for Doubtful Accounts 20,000

Percentage of Receivables
Ex 1: Estimate that 10% of accounts receivable is uncollectible Allowance for Doubtful Accounts
Accounts Receivable = $100,000 Adj:15000 $25,000 Beginning Balance

Adjusting entry: $10,000 Ending Balance

Allowance for Doubtful Accounts 15,000
Bad Debt Expense 15,000

Ex 2: Estimate that 5% of accounts receivable is uncollectible Allowance for Doubtful Accounts

Accounts Receivable = $250,000 $10,000 Beginning Balance
Adj: 2,500
Adjusting entry: $12,500 Ending Balance
Bad Debt Expense 2,500
Allowance for Doubtful Accounts 2500
Beginning Balance

Ending Balance

Beginning Balance

Ending Balance

Beginning Balance

Ending Balance