In the percent of sales method for estimating bad debt, what is the journal entry?

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

Answer: (B)

Under the percent of sales approach, you estimate bad debt as a portion of current period credit sales and record that cost now. The adjusting entry increases Bad Debt Expense on the income statement to reflect the expected uncollectible portion, and it increases the Allowance for Doubtful Accounts on the balance sheet to establish a contra-asset that reduces Accounts Receivable to net realizable value. That's why the correct entry is a debit to Bad Debt Expense and a credit to Allowance for Doubtful Accounts. When a specific receivable is later written off, you would debit Allowance for Doubtful Accounts and credit Accounts Receivable.