Oriole Company uses the percentage-of-receivables method for recording bad debt expense. The Accounts Receivable balance is $380000 and credit sales are $1520000. Management estimates that 6% of accounts receivable will be uncollectible. What adjusting entry will Oriole Company make if the Allowance for Doubtful Accounts has a credit balance of $3800 before adjustment?

Adjusting journal entry:

Dr Bad debt expense 19,000

    Cr Allowance for doubtful accounts 19,000

Explanation:

accounts receivable balance = $380,000

total credit sales = $1,520,000

6% of accounts receivable will be bad debt = $380,000 x 6% = $22,800

credit balance allowance for doubtful accounts account = $3,800, and it must increase to $22,800 ⇒ $22,800 - $3,800 = $19,000

Adjusting journal entry:

Dr Bad debt expense 19,000

    Cr Allowance for doubtful accounts 19,000

Allowance for doubtful accounts is a contra asset account with a credit balance that reduces the value of accounts receivable.