Allowance for Doubtful Debt Formula

Allowance for Doubtful Debt Formula

Allowance for Doubtful Debt can be calculated by the following formula. Allowance for doubtful may be calculated on the bases of credit sales or account receivable. However, most common practice is on the bases of account receivable.

Allowance = % of Doubtful Debt x Account Receivable

Percentage of doubtful debt allowance is primarily decided or determined on the bases of industry practice or historical data.

Allowance for Doubtful Debt Formula Example

Account balance = 70,000

Allowance for doubtful Debt = 8%

Calculate allowance for Doubtful debt?

Solution

% of Allowance for Doubtful Debt x Account Receivable

=8% x 70,000

=5,600 (Allowance for Doubtful Debt)

 Journal Entry for Doubtful Debt Allowance

An allowance is created, because debts are doubtful only, and therefore cannot be eliminated at the moment. It is important to note that though debtor are not eliminated or removed, however expense is charged under the prudence concept.

Date	Particulars	Debit	Credit
	Bad Debts	5,600
	Allowance for Doubtful Debt		5,600

 Allowance for Doubtful Debt Learning Example

Credit Sales = 100,000

Receivable Balance = 50,000

Allowance for doubtful Debt = 5%

Calculate allowance for Doubtful debt?

Solution

% of Allowance for Doubtful Debt x Account Receivable

=5% x 50,000

=2,500 (Allowance for Doubtful Debt)

Journal Entry for Doubtful Debt

Date	Particulars	Debit	Credit
	Bad Debts	2,500
	Allowance for Doubtful Debt		2,500

Purpose of Doubtful Debt Allowance

Purpose of Doubtful debt allowance can be listed as under

1.   Charge the expense in the accurate  period i.e. period of related sales

2.   Expense should not be understated under prudence concept.

3.   Exact or actual bad debt in next year would be charged to this account

Characteristics of Allowance Doubtful Debt

1.   Allowance for doubtful debt is a contra account.

2.   Allowance is based on the estimates of management or industry practice

3.   Actual bad debt rarely matches the allowance created.

 Allowance for Doubtful Debt Practice Question

Credit Sales during the Period= 120,000

Closing Receivable Balance = 100,000

Allowance for doubtful Debt = 10%

Actual Bad debt = 8000

Calculate allowance for Doubtful debt?

Solution

% of Allowance for Doubtful Debt x Account Receivable

=10% x 100,000

=10000 (Allowance for Doubtful Debt)

Journal Entry for Doubtful Debt

This year

Date	Particulars	Debit	Credit
	Bad Debts	10,000
	Allowance for Doubtful Debt		10,000

Next Year Entry

Date	Particulars	Debit	Credit
	Allowance for bad debt	8,000
	Receivable		8,000