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March 12, 2008

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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8 Responses to “Why is there a difference in the amounts for Bad Debts Expense and Allowance for Doubtful Accounts?”

  1. blessing on March 14th, 2008 7:05 am

    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.

  2. Papin on March 18th, 2008 7:40 am

    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?

  3. Papin on March 18th, 2008 7:51 am

    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

  4. Lassen Sitault Nancy on April 11th, 2008 12:30 pm

    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.

  5. Norae on July 18th, 2008 1:42 am

    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

  6. Hopeful on October 12th, 2008 9:05 am

    Question:
    I am working a problem to compute the days it take receivables to turn over ; I am given the NET Revenue 20 million and bad debt expense 2 million. I am also given Net Receivables 13 million.There is no mention of allowance for doubtful accounts. I am told that these are first quarter financial results for year 08 ( I am given other nmbers for year 07)
    I know that:
    Acc Rec Turnover=net credit sales divided by avg net receivables
    So I computed the following:

    20m-2m/(13m/3months)= 4.15 times

    so the turnover in days is 90/4.15=21.69

    Is this correct?
    Should I subtract bad debt from Net Revenue of 20m? Or should I ignore bad debt since it uses term NET Revenue.

    I have always used 365 days but now I need to review quarterly info. Would I use 90 days?
    Thank you for any help you can give me.

  7. wendy on June 23rd, 2009 1:12 pm

    how do we know what amount to estimate for in making a provision for bad debts and at what time in the financial year of a company can a provisiion be made?

  8. Sahil Khan on October 5th, 2009 12:14 am

    very good site thanks for the bad debts information.

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