- 1). Establish an allowance for doubtful accounts. You may estimate what portion of your accounts receivable is uncollectible. If every year 1 percent of your accounts receivables is uncollectible, multiply 1 percent by your accounts receivable balance to estimate your allowance for doubtful accounts. For example, the allowance for doubtful accounts balance is $10,000 -- 1 percent times $1,000,000 in accounts receivable.
- 2). Use your general ledger account to debit allowance for doubtful accounts -- balance sheet item -- for $10,000. Credit "bad debt expense" -- income statement item -- for $10,000.
- 3). Adjust your allowance for doubtful accounts as needed based on actual accounts receivable you had to write off during the year. For instance if at year-end you discover a credit balance of $9,000 for the allowance for doubtful accounts, this means you recorded an actual loss of $1,000. Write off losses by debiting allowance for doubtful accounts and crediting accounts receivable. To write off a $1,000 credit loss, debit allowance for doubtful accounts $1,000 and credit accounts receivable $1,000.
- 4). Close out the bad debt expense at year end by reversing the previous journal. In this case, debit bad debt expense and credit the allowance for doubtful accounts. Continuing with the previous example, debit bad debt expense for $1,000 and credit allowance for doubtful accounts by $1,000. This zeroes out the bad debt expense account for next year to record and tally the credit losses for the next accounting year.
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