Bad Debt Expense Journal Entry

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Bad Debt Expense Journal Entry is Debit the Bad Debt Expense Account and Credit the Accounts Receivable. Bad Debt Expense is recognized when a business estimates that some of its accounts receivable will not be collectible. This is essential for maintaining accurate financial records and reflecting the true financial position of the company. Here are detailed examples of how to record bad debt expense using different methods.

Example 1: Direct Write-Off Method

Suppose your business determines on December 31, 2024, that a customer account worth $2,000 is uncollectible. Under the direct write-off method, the company writes off the specific account.

Journal Entry on December 31, 2024:

DateAccount TitleDebit ($)Credit ($)
12-31-2024Bad Debt Expense2,000
12-31-2024To Accounts Receivable2,000

Explanation:

  • Bad Debt Expense is debited to recognize the loss due to the uncollectible account.
  • Accounts Receivable is credited to remove the uncollectible amount from the accounts receivable balance.

Example 2: Allowance Method (Percentage of Sales)

Suppose your business estimates that 2% of credit sales will be uncollectible. If the total credit sales for the year are $100,000, the bad debt expense would be:

Bad Debt Expense = Credit Sales × Estimated Uncollectible Percentage Bad Debt Expense = $100,000 × 2% = $2,000

Journal Entry on December 31, 2024:

DateAccount TitleDebit ($)Credit ($)
12-31-2024Bad Debt Expense2,000
12-31-2024To Allowance for Doubtful Accounts2,000

Explanation:

  • Bad Debt Expense is debited to recognize the estimated uncollectible amount.
  • Allowance for Doubtful Accounts is credited as a contra-asset account, reducing the net realizable value of accounts receivable.

Example 3: Allowance Method (Aging of Receivables)

Suppose your business uses the aging method to estimate bad debts. After analyzing the accounts receivable aging report, you estimate that $3,500 of the outstanding receivables will be uncollectible.

Journal Entry on December 31, 2024:

DateAccount TitleDebit ($)Credit ($)
12-31-2024Bad Debt Expense3,500
12-31-2024To Allowance for Doubtful Accounts3,500

Explanation:

  • Bad Debt Expense is debited to reflect the estimated uncollectible accounts based on the aging of receivables.
  • Allowance for Doubtful Accounts is credited to reduce the value of accounts receivable.

Example 4: Write-Off of a Specific Account Using Allowance Method

If a specific customer’s account worth $1,200 is deemed uncollectible on February 28, 2025, and you have already created an allowance for doubtful accounts, the write-off entry would be:

Journal Entry on February 28, 2025:

DateAccount TitleDebit ($)Credit ($)
02-28-2025Allowance for Doubtful Accounts1,200
02-28-2025To Accounts Receivable1,200

Explanation:

  • Allowance for Doubtful Accounts is debited to use the previously estimated uncollectible amount.
  • Accounts Receivable is credited to remove the specific uncollectible account from the books.

Example 5: Recovery of a Written-Off Account

If a customer pays $500 that was previously written off on May 1, 2025, the following entries are required to reverse the write-off and recognize the cash received:

Journal Entry to Reverse the Write-Off on May 1, 2025:

DateAccount TitleDebit ($)Credit ($)
05-01-2025Accounts Receivable500
05-01-2025To Allowance for Doubtful Accounts500

Journal Entry to Record the Cash Receipt on May 1, 2025:

DateAccount TitleDebit ($)Credit ($)
05-01-2025Cash500
05-01-2025To Accounts Receivable500

Explanation:

  • The first entry reverses the previous write-off by reinstating the accounts receivable and allowance accounts.
  • The second entry records the cash received from the customer, reducing the accounts receivable balance.

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