At the beginning of the current period, Waterway Industries had balances in Accounts Receivable of $190,800 and in Allowance for Doubtful Accounts of $9,670 (credit). During the period, it had credit sales of $730,800 and collections of $749,620. It wrote off as uncollectible accounts receivable of $7,511. However, a $3,339 account previously written off as uncollectible was recovered before the end of the current period. Uncollectible accounts are estimated to total $23,000 at the end of the period. (Omit cost of goods sold entries.)
(a) Prepare the entries to record sales and collections during the period.(b) Prepare the entry to record the write-off of uncollectible accounts during the period.(c) Prepare the entries to record the recovery of the uncollectible account during the period.(d) Prepare the entry to record bad debt expense for the period.

Answer and Explanation:

a. Journal entry to record sales and collection

Particular                         Debit            Credit

Accounts receivable       $730,800

Sales revenue                                      $730,800

(To record credit sales)

Credit sales gives rise to accounts receivables

Particulars              Debit             Credit

Cash                      $749,620

Accounts receivables                 $749,620

(To record collection

of sales made on credit earlier)

b. $7,511 was computed as uncollectible and need to be written off through allowance of doubtful accounts.

Particulars                                    Debit             Credit

Allowance for doubtful debts      $7,511

Accounts receivables                                         $7,511

(To write off uncollectible accounts)

Both accounts receivables balance and allowance for doubtful debt would be reduced by $7,511

c. Amount of $3,339 that was written off earlier is recovered. So, previous written off entry should be reversed.

Particulars                                    Debit             Credit

Accounts receivables                 $3,339

Allowance for doubtful debts                           $3,339

(To reverse written off entry)

Particulars              Debit             Credit

Cash                      $3,339

Accounts receivables                 $3,339

(To record receipt of uncollectible)

d. Amount of $23,000 is estimated as bad debts that would be charged to allowance of doubtful debts

Particulars                                     Debit             Credit

Bad debt expense                        $17,502

Allowance for doubtful debt                               $17,502

(To record bad debt expense)

Working note:

Balance in allowance for doubtful debts = $9670 (opening balance) - $7,511 (uncollectible) + $3,339 (collected previously written off account)

= $5,498

Bad debt expense amount charged to allowance for doubtful debt = 23000 - 5,498

=$17,502

credit history is used by lenders to determine whether you are a 'risky' person to give their money to.

having a short history provide very little data for the lenders. they wouldn't be able to determine your credit behavior from such a small samples. even if they are perfect.

having long credit history with few blemishes provide larger and more accurate data for the lenders to predict your credit behavior.