The proper use and estimation of bad debt reserves, also known as allowances for doubtful accounts, can help businesses avoid shocks to net profit caused by unpaid or underpaid obligations. Bad debt reserves are shown on a company's balance sheet as a line item underneath account receivables, the account it offsets or acts as a contra account to.In this case, writing off accounts receivable affects the balance sheet only; nothing changes to the income statement. This is due to the company has already recognized expenses when it makes allowance for doubtful accounts in the adjusting entry for the estimated losses from bad debt or uncollectible accounts.
Dr Doubtful debts expense $500 Cr Allowance for Doubtful debts asset $500 At the end of January Acc Rec amount is $15,000 so your allowance needs to be $750 in total, your entry this month will be DR expense $250 CR allowance asset $250 (as you already have $500 in the account). Aug 17, 2008 · Bad Debt Expense is an expense account, and as such it is closed at the end of the fiscal period. Expense accounts are temporary accounts (also called nominal accounts). Companies that use the allowance method for bad debts use the contra current asset account Allowance for Bad Debt. As such, it appears on the balance sheet.
Company A's Q1 ending balance of accounts receivable was 3,867,000. Using the percentage of sales method, Company A determined bad debt expense in the current quarter would be 16,350 (2% of credit sales). The current balance in the allowance for doubtful accounts was $60,990. The journal entry for bad debts expense would be: Estimate and record bad debts when the percentage of sales method is applied. Estimate and record bad debts when the percentage of receivables method is applied. Explain the reason that bad debt expense and the allowance for doubtful accounts will normally report different figures. Understand the purpose and maintenance of a subsidiary ledger.