Assuming that the allowance for bad debts account has a $200 debit balance when the adjusting entry is made, a $5,200 adjusting entry is necessary to give the account a credit balance of $5,000. If write‐offs were less than expected, the account will have a credit balance, and if write‐offs were greater than expected, the account will have a debit balance. Unless actual write‐offs during the just‐completed accounting period perfectly matched the balance assigned to the allowance for bad debts account at the close of the previous accounting period, the account will have an existing balance. If a company has $100,000 in accounts receivable at the end of an accounting period and company records indicate that, on average, 5% of total accounts receivable become uncollectible, the allowance for bad debts account must be adjusted to have a credit balance of $5,000 (5% of $100,000). One way companies derive an estimate for the value of bad debts under the allowance method is to calculate bad debts as a percentage of the accounts receivable balance. Percentage of total accounts receivable method.
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