What is the normal journal entry for recording bad debt expense under the allowance method? a. Debit Accounts Receivable, credit Allowance for Doubtful Accounts. b. Debit Allowance for Doubtful Accounts, credit Bad Debt Expense. c. Debit Bad Debt Expense, credit Allowance for Doubtful Accounts. d. Debit Allowance for Doubtful Accounts, credit Accounts Receivable. Explain the answer you selected: 1. 2. What is the normal journal entry for recording 2. Under the allowance method of recognizing uncollectible accounts, the entry to write off an uncollectible account a. has no effect on net income b. decreases net income c. increases the allowance for uncollectible accounts d. has no effect on the allowance for uncollectible accounts
The Correct Answer and Explanation is :
1. Normal Journal Entry for Recording Bad Debt Expense Under the Allowance Method
Correct Answer: (c) Debit Bad Debt Expense, Credit Allowance for Doubtful Accounts
Explanation:
Under the allowance method, bad debt expense is estimated and recorded in the same period as the related sales revenue to comply with the matching principle in accounting. The process involves the following:
- Debit Bad Debt Expense: This increases the expense account, which reduces net income to reflect the anticipated uncollectible accounts.
- Credit Allowance for Doubtful Accounts: This increases the contra-asset account under accounts receivable, reducing the net realizable value of accounts receivable.
This entry does not directly impact the Accounts Receivable ledger at the time of recording. Instead, the adjustment reflects anticipated losses based on historical data or other methods, ensuring financial statements remain accurate.
2. Write-Off Entry Under the Allowance Method
Correct Answer: (a) Has no effect on net income
Explanation:
When a specific account is deemed uncollectible, the write-off entry is made as follows:
- Debit Allowance for Doubtful Accounts: This reduces the contra-asset account.
- Credit Accounts Receivable: This removes the uncollectible amount from the accounts receivable balance.
This write-off does not affect net income because the bad debt expense was already recognized when the allowance was created. The net effect is a reclassification between the Allowance for Doubtful Accounts and Accounts Receivable, without any impact on the income statement.
Key Points:
- Allowance Method: A proactive way to recognize bad debts, ensuring financial statements reflect the anticipated losses.
- Matching Principle: Aligns bad debt expense with the revenues generated in the same period.
- Write-Offs: Simply remove the uncollectible accounts from the books without impacting income, as they utilize the previously established allowance.
By adopting this method, companies maintain accurate and compliant financial records.