Accounts receivable and allowance for doubtful accounts

Accounts receivable and allowance for doubtful accounts

Accounts receivable
--> "Allowance for doubtful accounts" is subtracted from accounts receivable balance
--> "Allowance for doubtful accounts" is a contra-asset account
--> a contra-asset account is subtracted from an asset account balance

[Example 1]

1. Entity A has accounts receivable balances from three customers as follows:
Customer 1: $100,000 --> 25 days old
Customer 2: $250,000 --> 35 days old
Customer 3: $200,000 --> 70 days old

2. Expected bad debts rate
--> Aging schedule method
--> estimate bad debts based on the aging of balances

--> following rates are assumed:
0 - 30 days: 0%
31 - 60 days: 2%
61 - 90 days: 5%
over 90 days: 10%

3. Estimated bad debts amount
= $250,000 x 2% + $200,000 x 5%
= $5,000 + $10,000 = $15,000

4. Journal entry to record bad debts expense

debit credit Bad debts expense 15,000         Allowance for doubtful accounts   15,000 5. Accounts receivable = $100,000 + $250,000 + $200,000 = $550,000 6. Allowance for doubtful accounts = $15,000 7. Accounts receivable less allowance for doubtful accounts = $550,000 - $15,000 = $535,000