Allowance for Doubtful Accounts

A customer has been invoiced a total of 5,000 for goods and the business has decided that there is doubt as to whether the customer can pay in full. They have decided to make an allowance for doubtful accounts of 500 against the accounts receivable balance.

The original invoice would have been posted to the accounts receivable control account, so the balance on the customers account before the allowance for doubtful accounts is 5,000.

An allowance for doubtful accounts is recorded in the bookkeeping records as follows:

Journal Entry for the Allowance for Doubtful Accounts

The accounting records will show the following bookkeeping entries for the bad debt expense.

Allowance for Doubtful Accounts Journal
Account Debit Credit
Bad debt expense 500
Allowance for doubtful accounts 500
Total 500 500

Allowance for Doubtful Accounts Bookkeeping Entries Explained

The bad debt is an expense for the business and a charge is made to the income statement through the bad debt expense account.
The amount owed by the customer is still 5,000 and remains as a debit on the accounts receivable control account.  However, the credit above is placed on the allowance for doubtful accounts in the balance sheet to reflect the uncertainty over payment.

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 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.

Allowance for Doubtful Accounts Accounting Equation
Assets = Liabilities + Owners Equity
Allowance for doubtful accounts =  None +  Bad debt expense
– 500 = 0 + – 500

In this case the allowance for doubtful accounts account, which is a contra asset account, is increased by the credit entry. In addition, the income statement has been charged with the bad debt expense, reducing the owners equity.

Note: The expense in the income statement reduces the net income which reduces the retained earnings and therefore the owners equity in the business.

Popular Examples

Another example for you to discover.

Allowance for Doubtful Accounts November 6th, 2016Team

You May Also Like

Related pages

trade debtor collection perioddiscount on notes payable is charged to interest expenseretained earnings debitdeferred revenue expenditureperpetual inventory vs periodic inventorybonds payable on cash flow statementdefine deferred taxeshow to calculate margin and markupcapital lease accounting journal entriesequipment lease calculator excelinvoice reconciliation processlump sum present valuenpv excel calculatorcontra asset accountsannuity with growth formuladepreciation on disposal of fixed assetssum of digits depreciationnpv annuitycogs definition accountingwhat is cash float in accountingprofit margin calculator downloadaccrued expenses double entrycost of goods manufactured and soldaccrued income definitionjournal entry for bad debt expensefuture value interest factor of an annuityhow to calculate variable cost per unitallowance for doubtful accounts entrybank reconciliation reconciling itemsbookkeeping partnersaccounting for royalty paymentscalculate loan amount excelaccounting basics quizwhat is consignment in accountingprepayment accounting entrycalculate gross margin percentage formulatally journal entrysales ledger control account examplepetty cash replenishmentcalculation of accrued interest on fixed depositdefine obsolete inventorycash and equivalents turnoverexcel bookkeepingallowance for doubtful accounts is what type of accountaccounting journals and ledgersunpresented cheques in bank reconciliationinterest accrualssimple general ledgercalculate pmt formulabrs formataccounting entries for closing a businesspetty cash bookkeepingspreadsheet template for small businesseffective annual rate of interest formulaassets turnover formulaformula for arrhow to calculate aging of accounts receivablecalculate total contribution marginoperating leverage ratio formuladouble declining method depreciationebit coveragejurnal petty cashsalary payable journal entryindirect labor is a part offavorable variancesa record in the accounting equation is calledperiodic inventory system cost of goods soldvariable overhead rate formulatrial balance sheet in excelmoney voucher templatedefine deferred revenue expenditurejournal entry for dividend incomesimply accounting chart of accountsinventory shrinkagehow to calculate contribution to sales ratiowhat is the quick ratio formulalessor capital lease accountingformula of total asset turnover ratioexamples of accounts receivablesingle step multi step income statementjournal entries for variancesreceivables examples