Accounting help - Bad Debts?

You make an adjustment for bad debts as one of your adjusting journal entries at the end of the year. If the total of the allowance for bad debts is greater than the actual bad debts, then you make the adjustment

Debit allowance for doubtful accounts

__Credit bad debt expense

If the actual bad debt is greater than the allowance, then you make the entry

Debit bad debt expense

__Credit accounts receivable

Remember that the allowance for doubtful accounts is a balance sheet item. The balance at the end of one year is the beginning balance for next year. If you don't subtract the prior year's allowance, the allowance for doubtful accounts may be too high. You would have the remaining balance carried from last year plus the amount you set up for this year. If the balance carried forward from last year is $10,000 and amount you set up for this year is $25,000, the general ledger would show a total of $35,000. You need to subtract the $10,000 from last year so that the balance going into this year is $25,000.

You don't always have to subtract the previous year's balance. It all depends on what allowance method you are using. In your case, you're using percentage of receivables. But if you were using the percentage of sales method, you would just add the new estimated bad debts to the existing balance.