The allowance for doubtful debts account has a balance at the start of the year of $1000. At the end of the year debts of $990, including $90 GST, are to be written off and the allowance for doubtful debts is to be adjusted to 10% of the closing accounts receivable balance of $22 000 (including $2000 GST). The amount for bad and doubtful debts appearing in the income statement for the year will be:

Question

Quizplus · Accepted Answer

The amount for bad and doubtful debts in the income statement includes the debts written off ($990) and the adjustment to the allowance for doubtful debts. The closing allowance should be 10% of the accounts receivable balance excluding GST ($22,000 - $2,000 = $20,000), which is $2,000. The opening balance of the allowance was $1,000, so the adjustment is an increase of $1,000 ($2,000 - $1,000). Therefore, the total for the income statement is $990 (debts written off) + $1,000 (adjustment to allowance) = $1,990.

The Allowance for Doubtful Debts Account Has a Balance at the Start