A company has $80,000 in outstanding in accounts receivables and it uses the allowance method to account for uncollectible accounts. Experience suggests that 5% of outstanding receivables are uncollectible. The current credit balance (before adjustments) in the allowance for doubtful accounts is $600. The journal entry to record the adjustment to the allowance account includes a debit to Bad Debts Expense for $4,000.

Question

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The correct adjustment should be $3,400, not $4,000. The estimated uncollectible amount is $4,000 (5% of $80,000), but since there is already a $600 credit balance, only $3,400 is needed to adjust the allowance account.

A Company Has $80,000 in Outstanding in Accounts Receivables and It