Allowance for Bad Debts Entry Example Help

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Understanding the Concept of Allowance for Bad Debts Entry

Debts that become irrecoverable are called Bad Debts. A bad debt may become bad partially or fully. The debt becoming bad is a loss for the business hence it is transferred to Bad Debts Account. The journal entry for Bad Debt is as follows
Bad Debts a/c Dr.
To Debtor’s a/c
Under Allowance for Bad Debt method means doubtful debts are estimated and taken into consideration. When bad debts actually occur and are written off the following entry is passed
Bad Debts a/c Dr.
To allow for Bad Debts a/c
Allowance for Bad Debts are shown in the Balance Sheet as deduction from Accounts Receivables.

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Allowance for Bad Debts Entry Example Explanation

The Concept can be understood with the help of an example.
Example: the amount of Accounts Receivables in a trial balance is $700000. You are required to write off $5000 as Bad Debts and allowance for bad debts @10% on accounts receivables.
Solution: the journal entries are as follows:
Bad Debts a/c Dr. $5000
To Accounts Receivables $5000
(Bad Debts written off)
Allow for Bad Debts will be calculated on $700000 – $5000 = $695000.
10% on $695000 = $69500
Bad Debts a/c Dr. $69500
To Allowance for Bad Debts $69500
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