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What is the type of account and normal balance of allowance for bad debts?

Allowance for Doubtful Accounts is a contra current asset account associated with Accounts Receivable. When the credit balance of the Allowance for Doubtful Accounts is subtracted from the debit balance in Accounts Receivable the result is known as the net realizable value of the Accounts Receivable.

How do you account for uncollectible accounts receivable?

When a specific customer’s account is identified as uncollectible, the journal entry to write off the account is:

  1. A credit to Accounts Receivable (to remove the amount that will not be collected)
  2. A debit to Allowance for Doubtful Accounts (to reduce the Allowance balance that was previously established)

How are uncollectible accounts recorded?

The entry to write off a bad account affects only balance sheet accounts: a debit to Allowance for Doubtful Accounts and a credit to Accounts Receivable. No expense or loss is reported on the income statement because this write-off is “covered” under the earlier adjusting entries for estimated bad debts expense.

What is the formula for calculating bad debt expense?

Estimating your bad debts usually involves some form of the percentage of bad debt formula, which is just your past bad debts divided by your past credit sales. Let’s say you’ve been in business for a year, and that of the total $300,000 in credit sales you made in your first year, $20,000 ended up uncollectable.

What methods do you use when calculating debt?

The two methods used in estimating bad debt expense are 1) Percentage of sales and 2) Percentage of receivables.

  1. Percentage of Sales. Percentage of sales involves determining what percentage of net credit sales or total credit sales is uncollectible.
  2. Percentage of Receivables.

What are bad and doubtful debts?

What is the difference between bad debt and doubtful debt? Whereas bad debt is cash that you know a client or customer isn’t going to pay, doubtful debt is cash that you predict will turn into bad debt. Officially, it hasn’t become bad debt yet – there’s still a chance of reclaiming the lost money.