What is the adjusting entry needed for Allowance for Doubtful Accounts in the trial balance if bad debts are expected to be 6% of accounts receivable?
The adjusting entry to be journalized at December 31, assuming bad debts are expected to be 6% of accounts receivable, is to debit Bad Debts Expense $370 and credit Allowance for Doubtful Accounts $370. Therefore, correct option is B.
Explanation:
The adjusting entry to be journalized at December 31, assuming bad debts are expected to be 6% of accounts receivable, is to debit Bad Debts Expense $370 and credit Allowance for Doubtful Accounts $370. This entry is necessary to increase the amount of the allowance for doubtful accounts, which represents an estimate of the accounts receivable that may not be collected due to customers defaulting on their payments. By debiting Bad Debts Expense, an expense account, and crediting Allowance for Doubtful Accounts, a contra-asset account, we are matching the estimated bad debts expense to the period in which the revenue was earned.
In this case, the debit balance in Allowance for Doubtful Accounts suggests that the existing allowance is not sufficient to cover the expected bad debts. Therefore, we increase the allowance by making the adjusting entry.