Allowance for Doubtful Accounts is a Debit the Bad Debt Expense Account and Credit the Allowance for Doubtful Accounts. Allowance for Doubtful Accounts is a contra-asset account that represents the amount of accounts receivable that a business does not expect to collect. This estimation is typically based on historical data or the financial condition of customers. When a company anticipates that certain receivables may not be collected, it records an adjusting entry to recognize bad debts.
Below are examples of how to make journal entries related to the Allowance for Doubtful Accounts.
Example 1: Setting Up an Allowance for Doubtful Accounts
On December 31, 2024, your business estimates that $3,000 of its accounts receivable will be uncollectible.
Journal Entry:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 12-31-2024 | Bad Debt Expense | 3,000 | |
| 12-31-2024 | To Allowance for Doubtful Accounts | 3,000 |
Explanation:
- Bad Debt Expense will debited to recognize the estimated cost of uncollectible receivables.
- Allowance for Doubtful Accounts will credited to create a reserve that offsets the accounts receivable balance.
Example 2: Writing Off a Specific Uncollectible Account
On March 15, 2025, your business decides to write off a $1,200 receivable from a customer that has gone bankrupt.
Journal Entry:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 03-15-2025 | Allowance for Doubtful Accounts | 1,200 | |
| 03-15-2025 | To Accounts Receivable | 1,200 |
Explanation:
- Allowance for Doubtful Accounts will debited to reduce the reserve since the bad debt is now being recognized.
- Accounts Receivable will credited to remove the uncollectible amount from the receivables balance.
Example 3: Adjusting the Allowance Based on New Estimates
At the end of the next fiscal year, December 31, 2025, your business reassesses its allowance for doubtful accounts. It estimates that $4,000 will be uncollectible, which is an increase of $1,500 from the existing allowance.
Journal Entry:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 12-31-2025 | Bad Debt Expense | 1,500 | |
| 12-31-2025 | To Allowance for Doubtful Accounts | 1,500 |
Explanation:
- Bad Debt Expense will debited to account for the additional estimated uncollectible amount.
- Allowance for Doubtful Accounts will credited to increase the reserve to the new estimated total of $4,000.
Example 4: Recovering a Previously Written-Off Account
On April 10, 2026, a customer unexpectedly pays $1,200 for an account that was written off as uncollectible.
Journal Entry to Reestablish the Receivable:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 04-10-2026 | Accounts Receivable | 1,200 | |
| 04-10-2026 | To Allowance for Doubtful Accounts | 1,200 |
Explanation:
- Accounts Receivable will debited to reestablish the receivable amount.
- Allowance for Doubtful Accounts will credited to reverse the write-off.
Journal Entry to Record the Cash Collection:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 04-10-2026 | Cash | 1,200 | |
| 04-10-2026 | To Accounts Receivable | 1,200 |
Explanation:
- Cash will debited to recognize the payment received.
- Accounts Receivable will credited to close out the reestablished receivable.
These examples demonstrate the various scenarios involving the Allowance for Doubtful Accounts, providing a comprehensive view of how businesses can manage their receivables and recognize potential bad debts.