Journal Entry for Allowance for Doubtful Accounts
The allowance for doubtful accounts is a contra-asset account used to estimate the portion of accounts receivable that may not be collectible. This is done using the aging method or a percentage of sales method. Below is an example of how to record the allowance for doubtful accounts.
Scenario:
A company estimates that 5% of its ₹200,000 accounts receivable will be uncollectible.
Calculation:
1. Recording the Allowance for Doubtful Accounts
Date | Particulars | Debit (₹) | Credit (₹) |
---|---|---|---|
2024-06-30 | Bad Debt Expense A/c | 10,000 | |
To Allowance for Doubtful Accounts A/c | 10,000 | ||
(Being provision made for doubtful accounts) |
Explanation:
- Bad Debt Expense A/c is debited to recognize the expense related to the estimated uncollectible accounts.
- Allowance for Doubtful Accounts A/c is credited to set up the contra-asset account that reduces the accounts receivable on the balance sheet.
Writing Off Specific Accounts Receivable
When it becomes clear that a specific account receivable is uncollectible, it is written off against the allowance for doubtful accounts.
Scenario:
A customer with an account receivable of ₹3,000 is unable to pay, and the amount is written off.
2. Writing Off Uncollectible Accounts Receivable
Date | Particulars | Debit (₹) | Credit (₹) |
---|---|---|---|
2024-07-15 | Allowance for Doubtful Accounts A/c | 3,000 | |
To Accounts Receivable A/c | 3,000 | ||
(Being specific doubtful account written off) |
Explanation:
- Allowance for Doubtful Accounts A/c is debited to decrease the allowance account.
- Accounts Receivable A/c is credited to remove the uncollectible account from the receivables.