If a company's estimates indicate that it will not collect 5% of its accounts receivable of $100,000, what would be the year-end adjustment to Allowance for Doubtful Accounts?

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Multiple Choice

If a company's estimates indicate that it will not collect 5% of its accounts receivable of $100,000, what would be the year-end adjustment to Allowance for Doubtful Accounts?

Estimating uncollectible accounts requires increasing the allowance to reflect expected losses. The company expects 5% of 100,000 to be uncollectible, which is 5,000. Since the Allowance for Doubtful Accounts is a contra-asset with a normal credit balance, the year-end adjustment is a credit to this account for 5,000 (with a corresponding debit to Bad Debt Expense). This entry raises the allowance to cover the anticipated losses and reduces net accounts receivable by 5,000.

Estimating uncollectible accounts requires increasing the allowance to reflect expected losses. The company expects 5% of 100,000 to be uncollectible, which is 5,000. Since the Allowance for Doubtful Accounts is a contra-asset with a normal credit balance, the year-end adjustment is a credit to this account for 5,000 (with a corresponding debit to Bad Debt Expense). This entry raises the allowance to cover the anticipated losses and reduces net accounts receivable by 5,000.

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