Allowance for Doubtful Accounts has a credit balance of $800 at the end of the year (before adjustment), and an analysis of accounts in the customer ledger indicates that the estimated amount of uncollectible accounts should be $16,000. Based on the estimate above, which of the following adjusting entries should be made?

a. debit Bad Debt Expense, $15,200; credit Allowance for Doubtful Accounts, $15,200

b. debit Allowance for Doubtful Accounts, $800; credit Bad Debt Expense, $800

c. debit Bad Debt Expense, $16,800; credit Allowance for Doubtful Accounts, $16,800

d. debit Bad Debt Expense, $800; credit Allowance for Doubtful Accounts, $800

A. Debit : Bad Debts Expense = $15,200

Credit : Allowance for doubtful Accounts = $15,200

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.

In the above example, the company’s estimated amount of accounts receivables to become bad debts has increased. The difference between the amounts is what is written under bad debts expense = $16000 - $800 = $15,200

Debit : Bad Debts = $15,200

Credit : Allowance for doubtful debts = $15,200

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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