Question

1. Sage Co. provides for doubtful accounts based on 4% of gross accounts receivable, The following data are available for 2017.

Credit sales during 2017		$4,244,100
Bad debt expense		57,800
Allowance for doubtful accounts 1/1/17		16,450
Collection of accounts written off in prior years (customer credit was reestablished)		7,250
Customer accounts written off as uncollectible during 2017		32,230

What is the balance in Allowance for Doubtful Accounts at December 31, 2017?

2. Explain the difference between bad debt expense, write offs and allowance for doubtful accounts. How can you find one from the other two?

Answer 1

	Allowance for doubtful accounts            1/1/2017	$16,450
Add:	Establishment of accounts written off in prior period	$7,250
Less:	Customer accounts written off in 2017	$32,230
Add:	Bad debt expense for 2017 (4,244,100*4%)	$169,764
	Allowance for doubtful accounts            31/1/2017	$161,234
Answer 2:-	A bad debt is an account that has ben clearly identified as not being collectible. This means that you remove that specific account receivable from the accounts receivable account, usually by creating a credit memo in the billing software and then matching the credit memo against the original invoice; doing so removes both the credit memo and the invoice from the accounts receivable report. A doubtful debt is an account receivable that might become a bad debt at some point in the future. You may not even be able to specifically identify which open invoice to a customer might be so classified. In this case, create a reserve account (also known as a contra account) for accounts receivable that may eventually become bad debts, estimate the amount of accounts receivable that may become bad debts in any given period, and create a credit to enter the amount of your estimate in this reserve account, which is known as the allowance for doubtful accounts. The debit in the transaction is to the bad debt expense. When you eventually identify an actual bad debt, write it off (as described above for a bad debt) by debiting the allowance for doubtful accounts and crediting the accounts receivable account. Write-Offs- At some point a debt will actually go bad -- a customer will fail to pay a bill for long enough that the company concludes that the account is uncollectible. When that happens, the company writes off the debt. For example, you have $20,000 in accounts receivable and a $300 allowance, for a net of $19,700. You determine that a customer who owes you $180 is never going to pay. To write off the debt, reduce both accounts receivable and the allowance by the amount of the bad debt -- $180. You now have an accounts receivable balance of $19,820 and an allowance of $120. Net accounts receivable remains the same: $19,700. The write-off doesn't directly affect your company's profitability because you've already "expensed" the bad debt. However, you may need to incur a new bad debt expense to replenish your allowance.