A company ages its accounts receivables to determine its end of period adjustment for bad debts. At the end of the current year, management estimated that $28,750 of the accounts receivable balance would be uncollectible. Prior to any year-end adjustments, the Allowance for Doubtful Accounts had a credit balance of $505. What adjusting entry should the company make at the end of the current year to record its estimated bad debts expense?

Debit : Bad Debts = $28,750

Credit : Allowance for doubtful debts = $28,750

Explanation:

An account for allowance for doubtful debts is a contra account created, predicting that certain debtors will not be able to pay for the goods and services they purchased. The amount may be based on historical experiences. Doubtful debts aren’t officially uncollectible, it is simply an estimation made, but bad debts are, where you have officially written off a certain accounts receivable as uncollectible.

An allowance for doubtful debts is recorded in the balance sheet, directly under accounts receivables. Bad debts are recorded as an expense in the income statement.

The entry to record the above transaction is:

Debit : Bad Debts = $28,750

Credit : Allowance for doubtful debts = $28,750

When the amount is officially declared uncollectible, the allowance for doubtful debts account will be debited and the accounts receivables account will be credited.

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