What is the entry for doubtful accounts if allowance for doubtful accounts has a credit balace of 800 at the end of the year before adjustments?

Answer 1

I see this is a very popular question- so I've expanded the response! First, it isn't a tax question...as this account cannot exist for taxes...which does not allow an allowance for bad debt...just the actual incurred. (An allowance account is an estimate of anticipated uncollectables)

For general accounting purposes, the account could have either a credit or debit balance at any given time. Analyse the position of the Co and determine what a reasonable reserve , if any, should be (using an historical unreceivable against the recorded sales is one method). Adjust the account to that amount, the offset to this balance sheet ac is on the income statement. All amounts determined uncollectible should be charged to this BS account, against this reserve. Hence whats happening...every month/period/so often, the financials charge an amount against the Income Statement, (lowering income), for anticipated uncollectibles (or bad debt). That amount is posted to the Balance Sheet. Future actually written off (found bad debts), are charged there, reducing the reserve. That has no income effect, the effect being taken when the original reserve was established. (For tax, the accrual/reserve is unacceptable (everyone would over reserve - lower income - pay less tax), but the actual charge off is, essentially going to the income tax income statement at that time). The anlaysis of what is required is crucial... for example maybe because an expected bad debt customer financial situation (or customer relations) improves and he pays, new collection efforts are successful, etc., it is possible (not even uncommon) that a reserve is more than needed. When that happens the books reduce the reserve and take it back to income.