@jasonrobins
No worries, I hope I can help =) In your example they are using the % of sales method. In either case the writing off of AR and recover is the same.
Using your example after the Mgmt thinks that 10% of sales are uncollectible, AFDA has $1,000 credited. Assuming that's the only balance and mgmt has to write off AR of $3,000 you would have to increase AFDA by $2,000 and then proceed with debiting the new AFDA balance of $3,000 and crediting you AR of $3,000.
Note when you “adjust” AFDA by $2,000 (to get a balance of 3k total), a Dr. of $2,000 goes to BDE.
So from your original:
DR BDE 1,000
CR AFDA 1,000
Adjusting entry to AFDA:
Dr. BDE 2000
Cr. AFDA 2000
Now you can write off AR of 3k:
Dr. AFDA 3000
Cr. AR 3000
The methods of % of sale and the ‘allowance' method are means to calculate how much bad debt expense you'll book. Both use the allowance account (AFDA) just differently.
The % of sales doesn't take into account the residual allowance balance
The ‘allowance method' makes the ending balance of AFDA equal to the calculated amount per the aging.
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