At the end of its financial year a company has an accounts receivable balance of $320,000 and an 'allowance for doubtful accounts' credit balance of $2,100. Following a review of the company's accounts receivable ledger, the auditor has determined that 1% of the accounts receivable balance should be provided for as doubtful accounts. The year end adjusting entry required is:

Question

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To adjust the allowance for doubtful accounts balance to reflect the estimation of 1% of the accounts receivable balance as doubtful, we need to increase the allowance by $1,100 ($320,000 x 1%). The adjusting entry would be to debit the bad debts expense account (an income statement account) and credit the allowance for doubtful accounts (a contra-asset account). Therefore, the correct option is D) Debit Bad Debts expense $1,100; Credit Allowance for Doubtful Accounts $1,100. Option A is incorrect because we don't know if the doubtful accounts will come from the current period's sales. Option B is incorrect because it debits the allowance for doubtful accounts account rather than the bad debts expense account. Option C is incorrect because it overstates the estimation of doubtful accounts.

At the End of Its Financial Year a Company Has