At the end of its financial year a company has an accounts receivable balance of $540,000 and an 'allowance for doubtful accounts' credit balance of $4,000. Following a review of the company's accounts receivable ledger, the auditor has determined that $3,000 should be provided for as doubtful accounts. The year end adjusting entry required is:

Question

Quizplus · Accepted Answer

The adjusting entry required is to credit the 'Allowance for Doubtful Accounts' with $1,000 ($4,000 - $3,000) and debit the 'Bad Debts Expense' account for the same amount ($1,000). This is because the auditor has determined that $3,000 should be provided for as doubtful accounts, but there is already a credit balance of $4,000 in the allowance account, indicating that the company has already recognized more doubtful accounts than it needs to. Therefore, we only need to adjust the account by $1,000. Choice A is incorrect because it does not involve the allowance account. Choice B is incorrect because it erroneously debits the allowance account instead of crediting it. Choice C is incorrect because it only adjusts the allowance account but does not recognize the bad debts expense.

At the End of Its Financial Year a Company Has