Question

In: Accounting

Im probably just forgetting stuff but here is my problem: Unadjusted trial balance Accounts Receivable 278,720...

Im probably just forgetting stuff but here is my problem:

Unadjusted trial balance

Accounts Receivable	278,720
Allowance for Doubtful Accounts		4,580

The allowance for doubtful accounts should be 5% of gross accounts receivable for adjusting entry

Allowance for Doubtful Accounts		9,356
Bad Debt Expense			9,356

(278720*5% -4580)

But my question is when I make the adjustment wouldn't this cause a negative balance on the trial balance? I thought allowance for doubtful accounts couldn't be negative since it was a contra account. Am I just forgetting something here or did I mess something up? Sorry I am just confused

Expert Solution

Don't worry nothing to confuse,

As per requirement of question the "The allowance for doubtful accounts should be 5% of gross accounts receivable for adjusting entry"

Total Gross Account Receivables is given is Trail Balance i.e. $2,78,720

So, Required Provision Amount i.e. 5% of $2,78,720 is $13,936

However Un-adjusted Trail Balance has Provision amount i,e. Allowance for Doubtful Accounts $4,580

So, We need to create additional provision (Allowance for Doubtful Accounts) of ($13,936-$4,580) = $9,356

Therefore to increase the Allowance for Doubtful Accounts upto $13,936 we need to create additional provision (Allowance for Doubtful Accounts) of $9,356

To create additional provision we need to further credit the Allowance for Doubtful Accounts by $ 9,356 and the corresponding debit will be Bad Debts Expenses.

Journal Entries would be

Bad Debts Expenses Account Dr. $9,356

To Allowance for Doubtful Accounts Cr. $9,356

(To record the Allowance for Doubtful Accounts upto 5% of the gross receivables as $4,580 provision already created remaining $9,356 created.)

Hope so your doubt will be clear if not please ask in comment section.

Do like if u satisfied with explanation.

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