ALLOWANCE FOR DOUBTFUL DEBT:
You work for Mandels Ltd and the debtors balance at the end of the year is £48,100 and the company makes a general allowance for doubtful debt of 2%. Where there is an existing allowance for doubtful debt of £1,406 at the beginning of the year, what will be the journal entry posting in the accounts for this year-end adjustment.
Double entry posting:
DR: Allowance for doubtful debt account (Balance sheet) £444
CR: Allowance for doubtful debt adjustment account (Profit & loss) £444
(2% x £48,100) = £962
This means there is a reduction in allowance for doubtful debt of
£1,406 - £962 = £444
The allowance for doubtful debt is set up to ensure that the profits of a business are not overstated in case some of the credit customers don’t pay up their debts; so there has to be an estimated amount set in the expenses. This is not an actual expense, and if the amount calculated for the current year is less than the amount charged in the accounts to date, then there is a reduction in expense (which is what is happen in this scenario).
The allowance is also an amount set against the Debtors Control Account and this will be a debit into the balance sheet account.