[Anonymous]

Allowance for doubtful accounts is driving me insane! I understand the reversal of a written off ADA, but I don’t understand the JE if your estimate for ADA was bad and requires an adjustment at YE.

For example lets say you have 500 in your ending balance of ADA, but an auditor says it should have been 450. I understand debiting ADA, but I dont understand crediting bad debt expense because that would decrease bad debt instead of increasing (which you should do according to a basic T-Chart). Can someone explain this adjusting entry to me?

[Anonymous]

ADA is a portion of your receivables that you think are NOT going to be collected. This is bad for your business, therefore every dollar that you put into ADA is an expense.

At the end of the year cumulatively management has said we think 500 dollars of our AR is going to not be collected, because of the matching principle we have to expense that when we recognize revenue, so every time we classified a dollar as ADA we recognized a dollar of expense.

Auditor comes in and says we don't think you have 500 bad dollars in AR, we think only 450 dollars of your AR is going to go bad. You expensed 500, but it should have only been 450. You have to decrease that expense by 50 dollars.

The normal balance of an expense is to debit, so when you decrease the bad debt expense you credit it.

[Anonymous]

ADA is a portion of your receivables that you think are NOT going to be collected. This is bad for your business, therefore every dollar that you put into ADA is an expense.

At the end of the year cumulatively management has said we think 500 dollars of our AR is going to not be collected, because of the matching principle we have to expense that when we recognize revenue, so every time we classified a dollar as ADA we recognized a dollar of expense.

Auditor comes in and says we don't think you have 500 bad dollars in AR, we think only 450 dollars of your AR is going to go bad. You expensed 500, but it should have only been 450. You have to decrease that expense by 50 dollars.

The normal balance of an expense is to debit, so when you decrease the bad debt expense you credit it.

[Author]

Replies