A company has $80,000 in outstanding accounts receivable and it uses the allowance method to account for uncollectible accounts. Experience suggests that 6% of outstanding receivables are uncollectible. The current credit balance (before adjustments) in the allowance for doubtful accounts is $1,200. The journal entry to record the adjustment to the allowance account includes a debit to Bad Debts Expense for $4,800.

Question

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The correct adjustment should be $3,600, calculated as 6% of $80,000 ($4,800) minus the existing $1,200 credit balance, resulting in a debit to Bad Debts Expense for $3,600.

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