A company had credit sales totaling $2,000,000 this year. The ...

Question

A company had credit sales totaling $2,000,000 this year. The company has a policy estimating 1.5% of credit sales to be uncollectible. The Allowance for Doubtful Accounts has a current debit balance of $2,000. What is the journal entry to record this year's bad debt expense? What is the ending balance in the Allowance for Doubtful Accounts?

Accepted Answer

I'm guessing you guys took a stab at this. Let's see how you did. So company has credit sales totaling 2,000,000 this year. The company has a policy estimating 1.5% of credit sales to be uncollectible. The allowance for doubtful accounts has a current debit balance of 2,000. So don't get thrown off here. It says a current debit balance of 2,000. Well, it generally has a credit balance. Right? And it will after we make this journal entry. Sometimes, it can end up with a debit balance because we're writing off accounts. Right? Remember, we write off accounts throughout the year and sometimes we estimate. Right? This is all an estimate. We estimated 1.5% are uncollectible. Well, it could just be the case that more than that were uncollectible. So we were writing off more accounts and it ended up with a debit balance in the allowance. Okay? So don't get too caught up in that fact. So let's go ahead and do our journal entry, for bad debt expense. So our BDE journal entry. A lot of acronyms there. Bad debt expense journal entry. So we just need to do our 2,000,000 times the 1.5%. So to turn that into a decimal, it would look like that. Right? We gotta move the decimal two points to the left and let's see what we get for our credit sales here. Or excuse me, for our our bad debt expense. 2,000,000 times 0.015. Well, 30,000. Okay. So 30,000 is our bad debt expense. So our journal entry is gonna look like this. Debit bad debt expense. Right? Because expenses go up with a debit and we're gonna credit allowance for doubtful accounts for 30,000. So there we go. That's our journal entry. Bad debt expense 30,000. Allowance for doubtful accounts 30,000. So let's go ahead and find the ending balance in the allowance for doubtful accounts and I like to do it with the t account. You might prefer the algebra method and just write out your base formula, be, beginning balance, plus additions, minus subtractions. I like the visual of the t account. Let's check it out. So we had a beginning balance. They told us a current debit balance of 2,000. So the beginning balance notice it's on this side. It's on the debit side this time because we wrote off basically more accounts than we had, put into our allowance. So our beginning balance is 2,000 debit and then what happens is we're gonna credit for the bad debt expense. Right? Notice in this entry, there's a credit to the allowance for doubtful accounts. So let's go ahead and put that in there. 30,000 as a credit and then were there any write offs? So write offs would be debits to this account, but this question doesn't mention any. Right? There were no write offs mentioned in the question, so we can assume that's 0. So what's going to be our final balance? We had a 2,000 debit balance and now we've credited 30,000, right? So we would have to do basically the 30,000 minus the 2,000 and we end up with a credit balance here, right? The credits were bigger than the debits so we end up with a credit balance. And this will be the ending balance in the allowance for doubtful accounts is 28,000. So notice the ending balance after we made our adjusting entries for for this, bad debt expense, it ends up with a credit balance. Right? Which is what we expect. The allowance for doubtful accounts is a contra asset and contra assets have credit balances and that's exactly what we see here after the entry. Cool? Let's go ahead and move on to the next video.

Struggling with Financial Accounting?

Watch next

Net Accounts Receivable: Percentage of Sales Method practice set