What is the journal entry for bad debt expense?

The journal entry is a debit to the bad debt expense account and a credit to the accounts receivable account. It may also be necessary to reverse any related sales tax that was charged on the original invoice, which requires a debit to the sales taxes payable account.

How does the matching principle apply to bad debt expense?

In order to comply with the matching principle, bad debt expense must be estimated using the allowance method in the same period in which the sale occurs. There are two main ways to estimate an allowance for bad debts: the percentage sales method and the accounts receivable aging method.

How do you record bad debt expense?

There are two ways to record a bad debt, which are: Direct write-off method. If you only reduce accounts receivable when there is a specific, recognizable bad debt, then debit the Bad Debt expense for the amount of the write off, and credit the accounts receivable asset account for the same amount.

What method of recording bad debts is more inclined towards the matching principle?

The allowance method
The allowance method is the more widely used method because it satisfies the matching principle. The allowance method estimates bad debt during a period, based on certain computational approaches. The calculation matches bad debt with related sales during the period.

What is the matching principle in financial accounting?

The matching principle is part of the Generally Accepted Accounting Principles (GAAP), based on the cause-and-effect relationship between spending and earning. It requires that any business expenses incurred must be recorded in the same period as related revenues.

What is expense matching?

The matching principle is an accounting concept that dictates that companies report expenses. Revenues and expenses are matched on the income statement. The profit or for a period of time (e.g., a year, quarter, or month).

What are the two methods for recording bad debt expense?

¨ Two methods are used in accounting for uncollectible accounts: (1) the Direct Write-off Method and (2) the Allowance Method. § When a specific account is determined to be uncollectible, the loss is charged to Bad Debt Expense.

How do you record allowance for uncollectible accounts?

The three primary components of the allowance method are as follows:

1. Estimate uncollectible receivables.
2. Record the journal entry by debiting bad debt expense and crediting allowance for doubtful accounts.
3. When you decide to write off an account, debit allowance for doubtful accounts.

How does the journal entry record bad debt expense?

Record the journal entry by debiting bad debt expense and crediting allowance for doubtful accounts. Allowance for Doubtful Accounts The allowance for doubtful accounts is a contra-asset account that is associated with accounts receivable and serves to reflect the true value of accounts receivable.

When is a bad debt expense written off?

Therefore, under the direct write-off method, a specific dollar amount from a customer account will be written off as a bad debt expense. if the bad debt journal entry occurred in a different period from the sales entry.

How is bad debt expense reported in accounts receivable?

Therefore, the business would credit accounts receivable of $10,000 and debit bad debt expense of $10,000. If the customer is able to pay a partial amount of the balance (say $5,000), it will debit cash of $5,000, debit bad debt expense of $5,000, and credit accounts receivable of $10,000.

How is the entry for bad debts adjusted?

Companies that use the percentage of credit sales method base the adjusting entry solely on total credit sales and ignore any existing balance in the allowance for bad debts account. If estimates fail to match actual bad debts, the percentage rate used to estimate bad debts is adjusted on future estimates.