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					                         Bookkeeping Tips
The American Institute of Professional Bookkeepers (www.aipb.org)                  VOL. 3: Issue 5

                     Adjusting Entries for Bad Debt Expense

Bad debt expense is an estimate of the portion of accounts receivable that the company does
not expect to collect. The journal entry to record the estimate of bad debt expense is as follows:

Bad Debt Expense
    Allowance For Doubtful Accounts
To record bad debt expense

    The year-end entry is only an estimate. The year-end balance in Allowance For Doubtful
Accounts becomes the next year’s beginning balance (Bad Debt Expense is closed out at year
end with all the other revenue and expense accounts).

    For instance, assume that at year-end 20X0, you record the following adjusting entry for
uncollectible accounts:

December 31, 20X0
Bad Debt Expense                         5,000
   Allowance For Doubtful Accounts                 5,000
To record bad debt expense

     Your company’s 20X0 ending balance in Allowance For Doubtful Accounts is $5,000, and
its 20X1 beginning balance in Allowance For Doubtful Accounts is the same $5,000.

    The key word is “doubtful.” This is the amount your company thinks it will never collect.
During 20X1, as it is determined that certain customers will not be paying their bills, you
remove the appropriate amounts from the doubtful category to the "sure" category.

     For instance, assume that the $5,000 estimate of bad debt for 20X0 included a $1,250
account receivable from BadCo. On March 3, 20X1, BadCo goes out of business, so you must
remove the $1,250 from the “doubtful” category to the “absolutely uncollectible” category, as
follows:

Allowance For Doubtful Accounts       1,250        (It is no longer doubtful—it will never be paid.)
    Accounts Receivable               1,250        (Remove this uncollectible from A.R.)
To write off uncollectible accounts

    To illustrate, here is a T-account of your company’s Allowance For Doubtful Accounts
during the first half of 20X1:

Allowance For Doubtful Accounts
                         5,000          1/1/20X1
3/3              1,250
3/27             3,000
4/12               125
5/31               350


                           275           Balance

                                                                                        (continued)
When management underestimates bad debt. As 20X1 continues, your company’s
estimate of bad debt turns out to have been too low. As you learn of new uncollectible
accounts, you continue to credit Accounts Receivable and debit Allowance For Doubtful
Accounts even if you go beyond the beginning balance of $5,000.

       Allowance For Doubtful Accounts
                      5,000        1/1/20X1
3/3            1,250
3/27           3,000
4/12             125
5/31             350
6/10           1,000
8/31             200
Balance          925

By year end, Allowance For Doubtful Accounts has a debit balance instead of a credit balance.

How Bad Debt Appears on the Financial Statements
Bad debt is an expense on the income statement. The allowance for doubtful accounts appears
on the balance sheet with total accounts receivable. The difference between accounts
receivable and doubtful accounts (Accounts Receivable – Allowance For Doubtful Accounts) is
the net realizable value. This is the amount that the company expects ultimately to collect
from customers. Just as accumulated depreciation reduces the value of the asset, allowance
for doubtful accounts reduces the value of accounts receivable.



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      Tel.: 800-622-0121, Fax: 800-541-0066, email: info@aipb.org. Web site: www.aipb.org

      The American Institute of Professional Bookkeepers (AIPB), is the national association
      for bookkeepers, currently with 30,000 active members

      AIPB was founded in 1987 for the following purposes:
      • To recognize bookkeeping as a profession—and bookkeepers as professionals
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        information
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