When using the allowance method to account for uncollectible accounts, which of the following is the correct journal entry to record estimated bad debts at the end of the period?

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

Answer: (D)

Verified step by step guidance

1. Understand the allowance method: The allowance method is used to account for uncollectible accounts by estimating bad debts at the end of the period. This ensures that expenses are recognized in the same period as the related revenues, adhering to the matching principle.
2. Identify the accounts involved: The journal entry for estimated bad debts involves 'Bad Debt Expense' (an expense account) and 'Allowance for Doubtful Accounts' (a contra-asset account). These accounts are used to reflect the estimated uncollectible amounts without directly affecting Accounts Receivable.
3. Determine the debit and credit: Bad Debt Expense is debited to increase the expense, reflecting the cost of estimated uncollectible accounts. Allowance for Doubtful Accounts is credited to increase the contra-asset account, reducing the net realizable value of Accounts Receivable.
4. Write the journal entry: The correct journal entry is: Debit Bad Debt Expense; Credit Allowance for Doubtful Accounts. This entry adjusts the accounts to reflect the estimated bad debts for the period.
5. Review the impact: This journal entry does not directly affect Accounts Receivable but adjusts the Allowance for Doubtful Accounts, which is used to offset Accounts Receivable on the balance sheet. This ensures the financial statements present a more accurate picture of expected cash collections.