Why is there a difference in the amounts for Bad Debts Expense and Allowance for Doubtful Accounts?
The amount reported in Bad Debts Expense is the loss that occurred from extending credit during the period of time indicated in the heading of the income statement. Bad Debts Expense is usually an estimated amount based on a company’s credit sales during the period or the change in the collectibility of its accounts receivable.
The amount reported in the Allowance for Doubtful Accounts is the estimated amount of the accounts receivable that will not be collected. The Allowance for Doubtful Accounts is a contra asset account or valuation account associated with the balance in Accounts Receivable. Since these two accounts are balance sheet accounts, their account balances must report the amounts that are relevant at a specific moment in time, namely the date of the balance sheet.
To illustrate, let’s assume that on December 31 a company had $100,000 in Accounts Receivable and its balance in Allowance for Doubtful Accounts was a credit balance of $3,000. For the first 30 days of January the company does not have any other information on bad accounts. Then on January 31 the company learns that an additional $1,000 of its accounts receivable will not be collectible. On January 31 the company will make an adjusting entry to debit Bad Debts Expense for $1,000 and to credit Allowance for Doubtful Accounts for $1,000. After this entry is recorded, the company’s income statement for the month of January will report Bad Debts Expense of $1,000 and its January 31 balance sheet will report a credit balance in Allowance for Doubtful Accounts in the amount of $4,000.
Learn more about Adjusting Entries. AccountingCoach.com also has three FREE interactive Crossword Puzzles on adjusting entries.
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5 Responses to “Why is there a difference in the amounts for Bad Debts Expense and Allowance for Doubtful Accounts?”
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Goodday to you and thanks so much for your replay, do you issue out certificate?
if you do, what type of certificate is it?
when is your exammination time or do you inform someone before or on time?
what it your distinsion mark,averagemark and low mark?
do i need to get a software that will enable me to study well or is everything that i need to known is there in your websit? so sorry to ask so many questions and plz i will like to have the reply on time so as to be able to take the next steep, and thank you for your understainding, GOODDAY.
what is the entry of a loan to an employee of a firm?
How do you write up the accounts of a firm that has not kept proper financial recorddings?
No, I do not issue out certificate. I expect my examination in two weeks time.
Distinction mark 95, average 80, low mark 65
I need a software that will enable me work well, especially accounting softwares/packages
hi thank you. what i need is the information about the baisc of financial accounting. for the moment we are looking at manufacturing, profit and lost account, and i going to write my exam in 1 week. my level in account in low so i want you to go slowly with. without forget than i`m a french not a english girl. but i`m trying to manage de language. thank you.
what is then entry for this
31 Dec 2007
accounts receivable 1,000
allowance for bad debts (1000)
05 January 2008
was able to Collect accounts receivable P500