Requirements
1. The T-accounts for Allowance for Bad Debts and Bad Debts Expense have been opened for you. Record the
transactions in the general journal. Post to the two T-accounts and keep running balances, assuming all accounts
begin with a zero balance.
2. Assume the December 31, 2017, balance of Accounts Receivable is $ 133,000.
Show how net accounts receivable would be reported on the balance sheet at that date.
Companies sell to their customers in cash or on account. Recall that sales "on account" are those where the customer
promises to pay the company at a later date. Sales on account create an accounts receivable asset for the company.
Accounts receivable, also called trade receivables, represent the right to receive cash in the future from customers
for goods sold or for services performed. Selling on account brings both a benefit and a cost. The benefit to a
business is the potential increased revenues and profits by making sales to a wider range of customers. The cost,
however, is that some customers do not pay, creating uncollectible receivables.
Customers' accounts receivables that are uncollectible must be written off or removed from the books because the
company does not expect to receive cash in the future. Instead, the company must record an expense associated with
the cost of the uncollectible account. This expense is called bad debts expense.
There are two methods of accounting for uncollectible receivables and recording
the related bad debts expense:
Direct write-off method
Allowance method
Requirement 1. The T-accounts for Allowance for Bad Debts and Bad Debts Expense have been opened for you.
Record the transactions in the general journal. Post to the two T-accounts and keep running balances, assuming all
accounts begin with a zero balance.
Begin by recording the 2016 transactions. Dec.31: Estimated that bad debts expense for the year was 3%
of credit sales of $ 420,000 and recorded that amount as expense. The company uses the allowance method.
Dialex Watches uses the percent-of-sales method to estimate the amount of bad debts expense. Use the following
formula to calculate the bad debts expense.
7 7 Estimated 7 7 7
Net credit sales x uncollectible percent 7 = Bad Debts Expense
$420,000 x 3% = $12,600
Now record the estimated bad debts expense for the year.
Remember that when using the allowance method, the offset to the expense is a contra account called Allowance for
Bad Debts. To record this expense on the books of Dialex Watches we must increase (debit) the Bad Debts Expense
account and (credit) the Allowance for Bad Debts account. (Record debits first, then credits. Select the explanation
on the last line of the journal entry table.)
Date Accounts and Explanation Debit Credit
2016 Bad Debts Expense 12,600 7
Dec. 31 Allowance for Bad Debts 7 12,600
(Adj.) Recorded bad debts expense for the period. 7 7
Dec.31: Made the closing entry for bad debts expense.
Refer to the entry you prepared in the preceding step. The Bad Debts Expense account holds a
$ 12,600 debit balance. To close this account we reduce (credit) the Bad Debts Expense account
by its entire balance$ 12,600 and then debit the Income Summary account by the same amount. (Record debits
first, then credits. Select the explanation on the last line of the journal entry table.)
Date Accounts and Explanation Debit Credit
2016 Income Summary 12,600 7
