At 30 June 2019 Shifty Ltd had a balance of Accounts receivable of $90 000 and an Allowance for doubtful debts of $4 000. It was further decided that the Allowance for doubtful debts should stand at 5 per cent of Accounts receivable. What was the journal entry needed to adjust the allowance account?
A) DR Bad debts expense $500
CR Accounts receivable $500
B) DR Bad debts expense $500
CR Allowance for doubtful debts $500
C) DR Allowance for doubtful debts $500
CR Accounts receivable $500
D) None of the above

Question

Quizplus · Accepted Answer

The adjustment required is to increase the Allowance for doubtful debts to 5% of Accounts receivable. This means the current allowance of $4,000 needs to be increased by $1,000 ($90,000 x 5% - $4,000). The journal entry required to adjust the allowance account is to debit Bad debts expense (an expense account) by $1,000 and credit Allowance for doubtful debts (a contra-asset account) by $1,000. Option A is incorrect because it credits Accounts receivable instead of the Allowance account. Option C is incorrect because it debits the Allowance account instead of Bad debts expense. Option D is not applicable as there is a correct answer.

At 30 June 2019 Shifty Ltd Had a Balance of Accounts