Upstart Enterprise's total revenue for last year is $300,000, and it estimates 2% of revenue as bad debts. Which of the following journal entries records the bad debts expense under the allowance method?
A) Debit Allowance for Doubtful Accounts by $6,000, and credit Bad Debts Expense by $6,000.
B) Debit Accounts Receivable by $6,000, and credit Bad Debts Expense by $6,000.
C) Debit Bad Debts Expense by $6,000, and credit Accounts Receivable by $6,000.
D) Debit Bad Debts Expense by $6,000, and credit Allowance for Doubtful Accounts by $6,000.

Question

Quizplus · Accepted Answer

Under the allowance method, the estimated bad debts are recorded as an expense and a contra-asset account, Allowance for Doubtful Accounts, is credited. Therefore, the correct journal entry is to debit Bad Debts Expense by $6,000 and credit Allowance for Doubtful Accounts by $6,000 (Option D). Option A is incorrect because it debits Allowance for Doubtful Accounts and credits Bad Debts Expense, which is the opposite of what should be done. Option B is incorrect because it incorrectly debits Accounts Receivable instead of expense account. Option C is incorrect because it incorrectly credits Accounts Receivable instead of Allowance for Doubtful Accounts.

Upstart Enterprise's Total Revenue for Last Year Is $300,000, and It