A business uses the allowance method for accounting for doubtful accounts, and has decided that a debt from a customer of 2,000 is not recoverable and needs to be recorded as a bad debt.
As the business uses the allowance method for bad debts, the journal entry is to the allowance for doubtful debts account as follows:
Journal Entry for the Allowance Method For Bad Debt
The accounting records will show the following bookkeeping entries when using the allowance method for bad debt.
|Allowance for doubtful accounts||2,000|
Allowance Method For Bad Debt Bookkeeping Entries Explained
The debit entry records the bad debt write off to the allowance for doubtful accounts.
The amount owed by the customer of 2,000 has been removed from accounts receivable by the credit entry, as it is no longer recoverable.
The Accounting Equation
The Accounting Equation, Assets = Liabilities + Owners Equity means that the total assets of the business are always equal to the total liabilities plus the owners equity of the business. This is true at any time and applies to each transaction. For this transaction the Accounting equation is shown in the following table.
In this case an asset (accounts receivable) has been reduced by the credit entry, and a contra asset account (allowance for doubtful accounts), is also reduced by the corresponding debit entry.
If should be noted that the effect of these two entries to write off bad debt is to reduce an asset account and a contra asset account by equal amounts. As a result of this, the value of the net accounts receivable in the balance sheet does not change.
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About the Author
Chartered accountant Michael Brown is the founder and CEO of Plan Projections. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a BSc from Loughborough University.