top button
Flag Notify
    Connect to us
      Facebook Login
      Site Registration Why to Join

Facebook Login
Site Registration

Why is there a difference in the amounts for Bad Debts Expense and Allowance for Doubtful Accounts?

+1 vote
5 views
Why is there a difference in the amounts for Bad Debts Expense and Allowance for Doubtful Accounts?
posted Jun 22, 2017 by Anushka

Share this question
Facebook Share Button Twitter Share Button Google+ Share Button LinkedIn Share Button Multiple Social Share Button

1 Answer

0 votes

The amount reported in Bad Debts Expense is the loss that occurred from extending credit during the period of time indicated in the heading of the income statement. Bad Debts Expense is usually an estimated amount based on a company's credit sales during the period or the change in the collectibility of its accounts receivable.

The amount reported in the Allowance for Doubtful Accounts is the estimated amount of the accounts receivable that will not be collected. The Allowance for Doubtful Accounts is a contra asset account or valuation account associated with the balance in Accounts Receivable. Since these two accounts are balance sheet accounts, their account balances must report the amounts that are relevant at a specific moment in time, namely the date of the balance sheet.

To illustrate, let's assume that on December 31 a company had $100,000 in Accounts Receivable and its balance in Allowance for Doubtful Accounts was a credit balance of $3,000. For the first 30 days of January the company does not have any other information on bad accounts. Then on January 31 the company learns that an additional $1,000 of its accounts receivable will not be collectible. On January 31 the company will make an adjusting entry to debit Bad Debts Expense for $1,000 and to credit Allowance for Doubtful Accounts for $1,000. After this entry is recorded, the company's income statement for the month of January will report Bad Debts Expense of $1,000 and its January 31 balance sheet will report a credit balance in Allowance for Doubtful Accounts in the amount of $4,000.

answer Jun 23, 2017 by Shantanu Arora
Contact Us
+91 9880187415
sales@queryhome.net
support@queryhome.net
#280, 3rd floor, 5th Main
6th Sector, HSR Layout
Bangalore-560102
Karnataka INDIA.
QUERY HOME
...