Question

Be prepared to show how to create the journal entries for the following transactions and explain how they were prepared

a) ABC Co. is preparing a balance sheet and has estimated that their allowance for doubtful accounts should increase by $10,000. (They are using the allowance method and not the direct write-off method).

b) The following period, ABC Co. wrote off an account shown at $500.

c) 10 days after they wrote off the account in b), the customer paid the balance in full.

Answer 1

a] As we are using allowance method, then we will create provision for bad debts by passing following entry.

Profit & Loss Account Dr 10000

To Provision for Bad debts 10000

b] As the party does not pay the amount, we will reduce the debtors by passing the following entry.

Provision for bad debts Dr 500

To Debtors 500

c] after 10 days, when we recoverd the amount then we pass the following entry for recovery

Bank Dr 500

To Bad Debts Recovered 500

At the time of creation of provision, we took it as expense, now recovered will considered as income.

Bad Debts Recoverd Dr 500

To Profit & Loss Account 500