Q8: What are the journal entries when we recognise a bad debt under the allowance method?
Under the allowance method, we write-off bad debts when we decide a particular customer is not going to pay their account with us. However, given we have already made an Allowance for doubtful debts we reduce this Allowance for doubtful debts (rather than again recognise a bad debts expense, which would be double-counting):
DR Allowance for doubtful debts
DR GST collected
CR Accounts receivable control – M. Turner
(Write-off of M. Turner’s account as bad)
You will also see we debit (DR) GST collected. It is at this stage of writing off a particular customer’s account as ‘bad’ or uncollectable, that we will also reduce (ie debit) our GST collected liability. We do not do this at the time we recognise the Allowance for doubtful debts. Why do you think this might be the case? You might like to think about this and discuss it with others in our unit. And even perhaps write a Peerwise question on it.