In this module, you will learn how to estimate and report the effects of uncollectible accounts. Under Generally Accepted Accounting Principles, or GAAP companies must use the allowance method to account for uncollectibles. This method involves the following steps: 1. Estimate and record uncollectibles with an end-of-period adjusting journal entry that increases Bad Debt Expense (debit) and increases the Allowance for Doubtful Accounts (credit). 2. Identify and write off specific customer balances in the period that they are determined to be uncollectible. The adjusting entry (in 1) reduces Net Income as well as Net Accounts Receivable. The write-off (in 2) has offsetting effects on Accounts Receivable and the Allowance for Doubtful Accounts, ultimately yielding no net effect on Net Accounts Receivable or on Net Income. Percentage of Credit Sales Method % of Credit Sales Method Bad Debt Expense Allowance fo Debit Credit Lounts % of Credit Sales Method Bad Debt Expense = Total Credit Sales x % Bad Debt Expense = $100,000 x 2% = $2,000 Knowledge Check 01 Madison Inc. reported sales of $1,000,000, a debit balance in Accounts Receivable of $80,000, and a credit balance of $5,000 in the Allowance for Doubtful Accounts. Management anticipates bad debt losses of 1% of credit sales. Prepare the end-of-period adjusting entry to record bad debt expense. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.) View transaction list Journal entry worksheet Record the bad debt expense. Note: Enter debits before credits. General Journal Debit Credit Transaction