Adjusting (BAD DEBTS)
Bad Debts - Uncollectible Receivables from customers.
2 methods of recording Bad Debts
1. Direct Write Off Method
-- Means that the company has an assurance that the receivables are no longer collectible.
2. Allowance Method
- Means that the company will have an allowance for the possible Uncollectible Accounts. The company
will give a certain rate for the allowance.
4 Sources/Basis of giving rate as an allowance.
1. Competitor
2. Receivables
3. Sales/Revenue
4. Experience
Receivable is the common source.
1. Bad Debts Write Off Method Sample
Ledger shows 90k account receivables
Assured Uncollectible - 10k due to deceased customer.
Adjusting Entry
Debit Bad Debts Expense
Credit Accounts Receivable
2. Allowance Method Sample
Ledger Shows 90k accounts Receivable
The company decided to give 5% from AR as an allowance
Debit Bad Debts Expense
Credit Allowance for Bad Debts
Or
Debit Doubtful Accounts
Credit Allowance for Doubtful Accounts