Using the allowance method, writing off an actual bad debts would include a:

Question

Using the allowance method, writing off an actual bad debts would include a:

 

A. Debit to Bad Debt Expense.

 

B. Credit to Accounts Receivable.

 

C. Debit to Accounts Receivable.

 

D. Credit to Allowance for Uncollectible Accounts.

Answer 1

Hi Bassam,

Let me explain the accounting process here as simply as possible:

1) When you sell goods or services to customers without getting paid upfront, you have an Accounts Receivable situation. You expect to receive that money sometime in the near future. Dr. Accts Receivable Cr. Sales is the entry you would make at the time of the sale.

2) Now  we know  that everyone we have extended credit to is not going to pay us, and the accounting rules say that we must allow  for that likelihood. So periodically we must make an adjusting entry for that, and Dr. Bad Debt Expense, Cr. Allowance for Uncollectible Accounts. This is just an estimate in order to make an educated guess of future uncollectible amounts.

3) When we can actually identify the defaulting customer(s) and the amount(s) they owe us, we need to get those amounts "off the books," or "write them off,"  that is, get them out of the Accounts Receivable balance. So we would Dr. Allowance for Uncollectible Accounts and Cr. Accounts Receivable, which is answer B.