What is the journal entry to record bad debt expense under the allowance method?

What is the journal entry to record bad debt expense under the allowance method?

• A. Debit Bad Debt Expense; Credit Allowance for Doubtful Accounts.
• B. Debit Allowance for Doubtful Accounts; Credit Bad Debt Expense.
• C. Debit Accounts Receivable; Credit Revenue.
• D. Debit Cash; Credit Bad Debt Expense.

Answer: (A)

Under the allowance method, you recognize the cost of estimated uncollectible accounts by recording a bad debt expense and setting up a contra-asset allowance. The correct entry is to debit Bad Debt Expense and credit Allowance for Doubtful Accounts. This increases the expense on the income statement and creates a reserve on the balance sheet that reduces Accounts Receivable when actually written off. The cash and revenue accounts aren’t touched at this stage, since no cash has been collected and revenue has already been recognized. If you debited Accounts Receivable or credited Revenue, you’d misstate assets or revenue. Debiting Cash would be inappropriate because no cash flow occurs at the estimation stage.

Under the allowance method, you recognize the cost of estimated uncollectible accounts by recording a bad debt expense and setting up a contra-asset allowance. The correct entry is to debit Bad Debt Expense and credit Allowance for Doubtful Accounts. This increases the expense on the income statement and creates a reserve on the balance sheet that reduces Accounts Receivable when actually written off. The cash and revenue accounts aren’t touched at this stage, since no cash has been collected and revenue has already been recognized. If you debited Accounts Receivable or credited Revenue, you’d misstate assets or revenue. Debiting Cash would be inappropriate because no cash flow occurs at the estimation stage.