Under the allowance method, which entry records bad debt expense?

Under the allowance method, which entry records bad debt expense?

• A. Debit Bad Debt Expense; Credit Accounts Receivable
• B. Debit Allowance for Doubtful Accounts; Credit Bad Debt Expense
• C. Debit Bad Debt Expense; Credit Allowance for Doubtful Accounts
• D. Debit Accounts Receivable; Credit Bad Debt Expense

Answer: (C)

Under the allowance method, you estimate uncollectible receivables and match that expense to the period of the sale. The correct entry to record this estimate is to debit Bad Debt Expense and credit Allowance for Doubtful Accounts. The allowance is a contra-asset that reduces the reported Accounts Receivable, giving you the net realizable value you expect to collect. This approach keeps the expense in the same period as the related revenue and avoids directly reducing Accounts Receivable until a specific account is actually deemed uncollectible. If a specific account later proves uncollectible, you would then debit Allowance for Doubtful Accounts and credit Accounts Receivable to write it off. Other options don’t fit the method: debiting Bad Debt Expense and crediting Accounts Receivable mirrors the direct write-off approach (not the allowance method); debiting Allowance for Doubtful Accounts and crediting Bad Debt Expense would decrease the allowance (and incorrectly move the expense); debiting Accounts Receivable and crediting Bad Debt Expense would inappropriately increase assets and reduce expenses.

Under the allowance method, you estimate uncollectible receivables and match that expense to the period of the sale. The correct entry to record this estimate is to debit Bad Debt Expense and credit Allowance for Doubtful Accounts. The allowance is a contra-asset that reduces the reported Accounts Receivable, giving you the net realizable value you expect to collect.

This approach keeps the expense in the same period as the related revenue and avoids directly reducing Accounts Receivable until a specific account is actually deemed uncollectible. If a specific account later proves uncollectible, you would then debit Allowance for Doubtful Accounts and credit Accounts Receivable to write it off.

Other options don’t fit the method: debiting Bad Debt Expense and crediting Accounts Receivable mirrors the direct write-off approach (not the allowance method); debiting Allowance for Doubtful Accounts and crediting Bad Debt Expense would decrease the allowance (and incorrectly move the expense); debiting Accounts Receivable and crediting Bad Debt Expense would inappropriately increase assets and reduce expenses.